First Home Loan Deposit Scheme - The Catch
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Coming up with 20% of the property’s price is a big challenge for many would-be buyers, but is the First Home Loan Deposit Scheme the solution?
What we know
The Coalition promised it would do just that if it won the May election and the details of its First Home Loan Deposit Scheme were announced in October.
The scheme will allow up to 10,000 first home buyers a year to get a home loan with a deposit of just 5%, instead of the standard 20%.
The catch
First, you’ll have to convince the lender that you can afford the repayments on a 95% loan-to-valuation ratio. You’ll be borrowing more than if you had saved the full 20% deposit.
The scheme is also limited to 10,000 loans each year offered on a first-in-first-served basis from January 1 for this financial year, with a further 10,000 available from July.
The scheme is also means-tested. You must be buying your first home as an owner-occupier and you can’t already own an investment property. Your taxable income must be less than $125,000 for a single and $200,000 for a couple and the loan must be for principal and interest.
There are also limits on the home price.
Further assistance
The scheme is on top of existing government assistance for first home buyers such as state government first homeowner grants and stamp duty concessions.
The federal government also has a First Home Super Saver Scheme, which allows you to save for your first home through your super account. You can save up to $15,000 a year (a limit of $30,000 overall) and withdraw it when you buy your home.
This can be more tax effective than saving outside super and your money is locked away until you buy your home or retire, so there’s no temptation to spend it.
Did you know
Around 110,000 first home buyers entered the market in 2018, suggesting the scheme will have only a marginal effect in making first home ownership easier.
Best-case scenario
The scheme can substantially reduce the time needed to save for your first home deposit. But on the flip side, you’ll be borrowing more so your repayments will be higher and you will end up paying more interest over the life of the loan.
Worst-case scenario
Low-deposit loans are inherently riskier than standard home loans. If the market turns down again, borrowers could find themselves with negative equity in their homes.
The wild card
Critics have argued that these types of government schemes often just drive up house prices rather than improve affordability.
However, the limited nature of this scheme, and the price caps, suggest that is unlikely this time around.