Financial Considerations For The First Home Loan Deposit Scheme
Australia’s first home buyers are lining up for the federal government’s First Home Loan Deposit Scheme, or FHLDS. Announced by the government last year, this scheme was put into effect only recently, on the 1st of Jan 2020.
There are numerous federal, state and/or territory government initiatives already in place that aim to usher our first home buyers into the housing and property markets. Out of these the more familiar initiatives are – the First Home Super Saver Scheme, the First Home Owner Grant Scheme, and stamp duty concessions. However, as a rule of thumb, these schemes require a minimum of 20% saved towards the deposit for guaranteeing the loan. FHLDS is different.
It gives hope to thousands of Australians who previously thought owning a home was out of reach!
FHLDS is limited and is available to only 10,000 applicants each financial year. It is based on the idea that under the current economic conditions, it may be difficult for our first home buyers to save towards an adequate deposit of 20% or higher.
So, the scheme makes it easy for eligible first home buyers to purchase their first home with a deposit of as low as 5% by guaranteeing them loans. Plus, under this scheme borrowers do not incur costs towards the Lenders Mortgage Insurance (LMI.)
While this scheme looks and sounds very interesting, there are certain financial considerations to make before applying for it and committing in earnest. In this blog post, we outline the crucial details. We highlight some advantages and disadvantages for your consideration, to help you make an informed decision.
What is FHLDS?
The First Home Loan Deposit Scheme is administered by the National Housing Finance and Investment Corporation (NHFIC) in partnership with several lenders. Here are the broad details:
Australian citizens who are over 18 years of age and first home buyers are eligible. This does not include permanent residents or people who own an investment property.
Eligible and single first home buyers shouldn’t be earning more than $125,000 a year.
Eligible couples shouldn’t be earning more than $200,000 a year and must be married or in a de facto relationship.
If you've saved just 5% of the purchase price of the property towards the deposit, the government can guarantee the remaining 15%.
You will be required to borrow the remaining 95%, but you can avoid LMI premiums entirely.
Your mortgage needs to be an owner-occupied loan with principal-and-interest repayments.
The value of eligible homes under the scheme varies by state and city or region.
You must intend to live in the home, investment properties are not supported.
Watch Oakmont’s video on FHLDS that explains everything in detail.
Smaller deposit spells larger debt
FHLDS makes it easy for first home buyers to purchase their first home sooner. So, while you are cutting down on the time to save for a deposit, there is a trade-off – the smaller deposit means a larger mortgage and a potentially longer period required to pay off the mortgage on your home.
Comparing the repayments under each option (the 20% scheme versus the 5% scheme) will show you the difference in interest payments over the life of the loan.
When property value falls
When the value of your property falls under a 5% deposit scheme, you risk ending up with negative equity. Negative equity is when your mortgage is significantly larger than the value of your property. Having negative equity can make it more difficult for you to either sell or to refinance your property.
When property value increases
When the value of the property increases as you are paying off your mortgage, you are gaining equity even while paying more interest. Consider if you were still saving for that 20% deposit while the prices kept rising, the amount of money you would need to save would only continue growing.
Applying the statistics for your city/suburb/area will let you evaluate your case under both scenarios – when property values drop and when they go up.
If you are looking for guidance on the First Home Loan Deposit Scheme or personalised advice on any aspect of Financial Planning – we are here to help. Talk to us today. We would be delighted to hear from you!
General Advice Disclaimer
The information contained on this website and in this blog-post is general in nature and does not take into account your personal situation or circumstance. It is recommended that you consider and use the information provided responsibly, and where appropriate, seek professional advice from a financial adviser.
Although, every effort has been made to verify the accuracy and correctness of information, Oakmont Financial Group, together with our consultants, officers, agents, and employees, disclaim all liability for any loss or damage suffered by any persons directly or indirectly relying on this information.