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From January 1st, 2020 the Federal Government will kick off its First Home Loan Deposit Scheme (FHLDS) which is designed to help first time home buyers get into the property market with just a 5% deposit, saving them thousands of dollars in Mortgage Insurance premiums. We are already hearing of First Home Buyers who are making their 2020 New Year’s Resolution – “BUY MY FIRST HOME”, but how many of these resolutions will be broken before the new year even begins?
We are quickly approaching the launch date and while we know some eligibility criteria there are still several unknowns about how the Scheme will be administered.
This article explains why you shouldn’t expect a walk-up start. If you’re a first home buyer who thinks you’ll be able to enter the world of home ownership with a 5% deposit from next year – think again. In addition to the eligibility criteria, you’ll need to meet lender policy and be up against 100,000 other people scrambling to get access to this very limited program.
Who is Eligible?
First home buyers purchasing an Owner Occupied property (i.e. a house to live in, not an investment).
Must earn less than $125,000 per year for single applicants, or less than $200,000 for couples.
Purchase price of the property must be below the cap, which depends on location. In NSW for example, a cap of $700,000 applies to Sydney, Newcastle and Wollongong; and $450,000 for the rest of the state.
You must contribute a minimum of 5% of the purchase price of the property yourself.
You must be able to obtain a loan for the remaining 95% of the purchase price and cover all additional costs (such as Conveyancing and Legal Fees).
Only available to the first 10,000 approved applicants each year.
How is the Scheme Different to What’s Offered Now?
While it is already possible buy a home with a 5% deposit and borrow the other 95%, Lenders Mortgage Insurance (LMI) will need to be paid and this can be a substantial cost. There are a small number of lenders who allow you to borrow the LMI as well, which means you end up with a loan that is around 97-98% of the value of property being purchased. But most lenders will cap your loan amount to a maximum of 95% including the LMI which means you’d really need to save more like 8% to cover the LMI premium yourself. The First Home Loan Deposit Scheme now means that it’s possible to save just 5% and not need to pay a costly LMI premium. You still need to borrow the remaining 95% but instead of paying the Mortgage Insurer to guarantee the loan, the Federal Government will for free.
The potential savings for a First Home Buyer with a 5% deposit is significant, especially where the State Government is providing a Stamp Duty concession and/or a First Home Owner Grant. As an example, a property in NSW selling for $650,000 incurs additional Stamp Duty of $24,682. With a 5% deposit, the LMI would be around $27,000. But as a first home buyer, you could take advantage of the NSW State Government’s First Home Buyer Assistance Scheme and avoid the stamp duty costs. If you were also eligible for the Federal Government’s First Home Loan Deposit Scheme then you wouldn’t need to pay the LMI. A total saving of $51,000, plus the $28,000 in interest you’d otherwise pay over a 30 year loan term. So the State and Federal Government are helping first home buyers to save up to $80,000 in the long run.
What Are the Roadblocks?
The benefits of the FHLDS are clearly substantial and being able to get into a home with just a 5% deposit will be very appealing to those who are eligible, but there are hurdles and many people will struggle to take advantage of the scheme and may need to look at alternatives to get into their first home faster.
Last year there were around 110,000 home loans taken out by first home buyers. The FHLDS will be limited to 10,000 approved applicants each year on a “first in – best dressed” basis. While not all the 110,000 first home buyers would have been eligible for the scheme, many would, suggesting that all of the 10,000 guarantees would likely be exhausted by around February 2020. First home buyers who miss out on their piece of the scheme would then need to wait it out until the following year for the next wave of guarantees to be released.
Lender Credit Policy will play a big part in making this Scheme successful. As it stands today, there are less than a handful lenders who will allow you purchase a home with a 5% deposit. Those who do charge an interest rate that is around 1% higher than if you were to contribute more. Lenders do this as they perceive there to be more risk associated with an applicant who is only able to save 5% compared to someone who has 10%, 20% or more. The problem here is that although you’ve been able to buy a home with just a 5% deposit, you’ll be stuck paying this higher interest rate for some time. Not until you’ve built up 20% equity in the property will you be able to refinance your loan for a more competitive rate, which is likely to be 5 or more years down the track. It is still yet to be confirmed which lenders will amend their Credit Policy and take on applicants who only have a 5% deposit.
The Government has said that the “Big 4” banks and their subsidiaries will be not be permitted to facilitate more than 5000 of the loan guarantees per year to help enhance market competition. This includes Commonwealth Bank (including Bankwest); Westpac (plus St George, Bank of Melbourne and Bank SA); along with NAB and ANZ. Where does that leave a consumer if they apply for a loan through one of these lenders but they’ve already met their volume cap? You could be in a situation where you need to shop around from lender to lender which can have a detrimental impact on your Credit Score making finance approval harder.
There is still a lot that needs to be fleshed out and with less than 6 weeks until launch, it could make for a sloppy unveiling.
Are You Prepared?
So, you meet the eligibility criteria and you plan on making “Buy My First Home” your 2020 New Year’s Resolution. Are you sure you’re ready? You might meet the criteria of the Scheme, but will you be able to demonstrate your credit worthiness to a lender?
Where did you get that 5% deposit from? Have you genuinely been saving this money bit by for a while now, or do you plan on getting a handy Christmas gift from mum and dad? When you only contribute a 5% deposit, lenders have very strict policies around “Genuine Savings” and the minimum time frames that you need to have accumulated and held that money for.
Do you know your borrowing capacity? While you might think you can afford a monthly mortgage repayment the bank views your ability to service a loan very differently by applying various benchmarks and buffers. It is not uncommon for someone’s borrowing capacity to fluctuate by $50,000 or more from one lender to another, so knowing where you’re going to get the best result could be game changing.
Have you been tempted to buy something on Afterpay? Did you overlook last month’s ZipMoney payment? Will your credit card be maxed out and over the limit this Christmas? These are all potential obstructions that are going to stand in your way when trying to get approved for a home loan. It is best to understand how such facilities can impact your ability to borrow for a home loan.
What does your bank statement look like? Do you spend too much on a night out? Did you make a few too many transfers into your online betting account last week? How much of your pay do you spend as oppose to save? Your living expenses are something that lenders focus on and if you’re spending too much, it could be a red flag. You might need to make some adjustments to your spending habits to be able to demonstrate an ability to borrow what you need. But an overnight change won’t be enough, depending on the lender you seek finance from, you may need to provide 3 months of transaction history.
You’re only contributing 5%, but the seller of the house you want to buy wants a 10% deposit – how are you going to do that? There are a few ways, but it is important that you engage with a good Conveyancer who may be able to help negotiate the sale terms. Alternatively, you’d want to ensure that you have some additional funds available to purchase a Deposit Bond to keep the vendor happy and ensure that they accept your offer.
If you want to be ready for the January 1st launch, there are probably a few things that you need to get in order and if that’s the case, it is better to act now rather than wait. Remember that only 10,000 approvals will be provided per year and they are likely to be snapped up in the first couple of months of 2020. If you’re not prepared you may need to wait until 2021 to get into your first home. This could be hard to swallow if your heart is set on taking advantage of the First Home Loan Deposit Scheme and getting into your first home next year. But depending on your situation there are other options available to help get into your first home with a minimal deposit – it’s just a matter of knowing how.
As a Mortgage Specialist, I’ve helped many of my clients get into their first home and can help you too. Why not arrange a free consultation, so we can work through your eligibility for both the Scheme and Lender Policy to ensure that when 2020 comes around you can start the new year on a positive note, in your own home.
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