Did you know that it can take up to seven years for the average household to save a 20% deposit for their first home loan ? However, a new scheme promises to drastically reduce that time by dropping the required deposit to just 5%.
The Coalition government has recently announced a plan to let first home buyers borrow up to 95% of the value of a property and still avoid paying lenders mortgage insurance (LMI).
Now, the First Home Loan Deposit Scheme “isn’t free money”, but it does means fewer young Australians will need to ask the “bank of mum and dad” for cash upfront.
Labor has now matched the proposal, meaning it should go ahead no matter who wins government this election.
Why is this a big deal?
As it stands, it is possible to get a home loan with just a 5% deposit.
But people with a deposit of less than 20% usually have to pay LMI, which can be a pretty big deterrent if you’re wanting to purchase your first property.
Basically, LMI is the insurance that reimburses a lender if a property is repossessed and sold for less than its outstanding mortgage debt.
The insurance is designed to cover the lender, but the premium is paid by the borrower.
Under the new scheme, the government would guarantee the additional amount needed to reach the 20% threshold, which would save borrowers thousands of dollars in LMI.
How much could I save?
Let’s say you want to purchase a $400,000 home to get your foot in the property market.
Currently, if you have saved up $62,000 for the deposit and fees, you’ll have around a 15% deposit. In that case, you’ll pay about $3,500 in LMI.
If you have pulled together a 10% deposit ($42,000 in savings), you’ll be up for $6,500 in LMI.
And if you’ve only put away a 5% deposit ($22,000 in savings), you’ll face $12,500 in LMI.
As you can see, that’s quite a lot of money you’ll be able to save in LMI under the new scheme.
The key features of the government’s policy:
We’ve gone through the government’s policy and pulled out some of the key bits we think you should know . They are as follows:
– The scheme will start on 1 January 2020.
– To be eligible first home buyers can not have earned more than $125,000 in the previous financial year, or $200,000 for couples.
– The scheme will be limited to 10,000 first home buyer loans each year.
– The lender will still have to undertake the full normal credit check process .
– If the borrower refinances, or the loan comes to an end, the Commonwealth support will terminate.
– First home buyers will be able to use the scheme in conjunction with other relevant State first home buyer grants and duty concessions.
Other factors to consider
Keep in mind that having a 5% deposit, rather than a 20% deposit, means that the monthly repayments on your home loan will be larger.
You’ll also likely pay tens of thousands more dollars in interest over the life of a 20-30 year home loan.
That said, this scheme will enable many young Australians to start growing their property portfolio years earlier than they otherwise could have.
And for most people, it will also mean they can save a few years paying rent.
For example, if you’re paying $400 a week in rent, that’s $62,000 over three years that could have gone towards the mortgage on your first property instead.
As we’ve alluded to, lenders will still be required to go through all the checks to ensure a first home buyers are genuinely able to afford their home loan mortgage.
We’d love to provide you with some helpful tips to ensure that when lenders look through your accounts your prepared. If you want help getting into the property market, please do not hesitate to get in touch.