Buying a home is arguably one of the biggest purchases you will ever make. Apart from the obvious cost – the asking price – there are many others associated with a real estate purchase. There are mortgage fees, conveyancing costs, inspection reports, and insurances, and these expenses can quickly mount up and become overwhelming for the first-time buyer.
So, it’s imperative to do your due diligence and research the various schemes available to assist you to get into your first home. And the latest of these is the recently announced First Home Loan Deposit Scheme.
What is the First Home Loan Deposit Scheme?
On January 1, 2020, the Federal Government introduced a new incentive program to assist first home buyers into the real estate market sooner by essentially ‘going guarantor’ on the deposit. The Government guarantee of up to fifteen percent of the purchase price, while not a cash grant, relieves first home buyers from the added financial burden of Lenders’ Mortgage Insurance (LMI) if they haven’t yet been able to save up a sufficient deposit.
LMI is payable on a mortgage if the deposit available is less than twenty percent of the purchase price. But don’t be misled by the name; LMI is an insurance that protects the lender in the case of default, not the buyer. Optional Mortgage Protection insurance is available if you wish to protect yourself from unforeseeable circumstances which impact your ability to make repayments.
The amount of LMI payable depends on the size of your loan, and it can be built into the principal loan amount and repaid along with the regular repayments. However, this new Government scheme bridges the shortfall between the deposit amount (which must total at least five percent) and the twenty percent threshold, representing a significant saving – in the vicinity of $10,000.
You must meet all of the following criteria:
- Be an Australian citizen at least 18 years of age
- Have a taxable income of up to $125k (single) or $200k (couple)
- Couples must be either married or in a de facto relationship
- Have a deposit of at least five percent of the purchase price of the property
- Take out a principal and interest loan (limited exceptions for interest only loans)
- Must occupy the property immediately after purchase
- Must not have previously owned property in Australia, either separately or together
There are also conditions related to the type of property being purchased and its cost. Though less restrictive than the First Home Buyer’s Grant scheme, which usually requires the purchase of a new property, prices are capped, depending on the location, and vary from state to state. Caps range from $375K in the Northern Territory to $700K in the NSW state capital. Capital city caps also apply to regional centres with populations over 250K, such as Newcastle, Wollongong, Gold Coast, Geelong, and others.
To be eligible for the deposit scheme, mortgage applications must be made via approved lending institutions or their registered brokers, for eligible properties, by eligible buyers, on or after January 1, 2020 for a term of 30 years or less.
The Government has set a limit of 10,000 deposit guarantees per financial year. Given that this figure represents only about ten percent of the total number of first home buyers across Australia in 2018/19, competition will be fierce, and places will fill up quickly. The scheme may also offer an advantage to those earning at the upper end of the annual income limits, since they will be able to save the required deposit amount more quickly than those on lower incomes.
Before applying for assistance under the First Home Loan Deposit Scheme, you should carefully consider your situation and whether it is likely to change significantly in the future. Taking out a mortgage with a smaller deposit will increase the size of your repayments and the total amount you will ultimately have to repay over the life of the mortgage. You also need to meet all the lender’s regular income and expenditure requirements and have a good credit rating.
Further, the guarantee ceases if you later move out of the property and rent it out. You must continue to occupy the property for the guarantee to remain in place. Not doing so may render you liable to additional fees and charges, such as LMI.
How to apply
The two approved major lending institutions, NAB and CBA, will begin offering guarantee places from January 1, 2020. They have been awarded 5,000 guarantees between them. A further group of non-major lending institutions will begin offering the remaining 5,000 guarantees from February 1, 2020.
You should register your interest and apply directly to them in the first instance. Further information and fact sheets are available on the National Housing, Finance and Investment Corporation website at https://www.nhfic.gov.au/what-we-do/fhlds/