What is it?
As part of his 2019 Federal election campaign Scott Morrison proposed the First Home Loan Deposit Scheme (FHLDS). The scheme is modelled on a similar scheme in New Zealand, which has been running since 2003.
The scheme helps eligible first home buyers purchase a house with a deposit as low as 5% and is expected to launch on the 1st of January 2020 in Australia.
So how does it work?
Ordinarily with a deposit below 20% a borrower would be required to pay Lenders Mortgage Insurance (LMI) which is an insurance policy that insures the lender, in the event of the borrower defaulting on their mortgage.
Now LMI is expensive. For example, normally a borrower at 95% LVR on a property valued at $475,000, their LMI would be just short of $15,162. (Source https://www.genworth.com.au/lenders/lmi-tools/lmi-premium-estimator/)
So, it is a massive saving if you can avoid paying LMI.
The administering body is the National Housing Finance and Investment Corporation (NHFIC).
- There is an income cap of $125,000 for a single or $200,000 for a couple.
- If you are a couple you must BOTH be first home buyers.
- The value of homes that can be purchased under the Scheme varies on a regional basis, reflecting the different property markets across Australia. So, a first home buyer in Sydney will have a higher eligible purchase value than say a Brisbane first home buyer.
- In Queensland there will be a price cap of $475,000 in capital cities and regional centres, with a cap of $400,000 in the rest of the state. The $475,000 cap will apply to both Gold Coast and Sunshine Coast.
- The First Home Loan Deposit Scheme is limited to 10,000 first home buyers. These will be qualified for the scheme on a first come first served basis!
In 2018 over 110,000 Australians bought their first home. So, assuming we have a similar number of first home buyers in 2020, then there are only enough places for 9% of them. The scheme will certainly be over subscribed.
There is a likelihood that the first come first served model, will potentially cause a short-term spike in prices in the first home buyer market, as FHBs rush to subscribe to the FHLDS.
If providing ongoing housing affordability for first home buyers is the purpose of the scheme, then creating a price hike in their market, pretty much defeats the purpose of the scheme.
What’s the downside?
It is important to keep in mind the Federal government is only acting as guarantor for the Lenders Mortgage Insurance.
Yes, it will remove the cost of LMI from the deal, but you are still going to be borrowing potentially 95% of the value of your property, which is a pretty daunting prospect.
I always advise my first home buyer clients that ideally, you want to aim for that 20% deposit. That way LMI isn’t required, you can get the best rates on offer from the lenders and you have an equity buffer should property prices fall.