The First Home Loan Deposit Scheme

Yesterday Scott Morrison announced that a Coalition government will underwrite home loan deposits for first-home buyers, who are unable to reach the 20 per cent that most banks require. Bill Shorten has said that Labor will match it. This policy will hopefully allow a lot of first home owners to get into the market earlier than they were expecting. We thought we’d break down what this means and what things first home owners should be aware of when they’re looking at getting their foot in the market. Please note that this is only a proposal and is not law yet and may look different by the time it gets passed through the parliament, if it does.
What is the current situation?
Currently for first home owners most banks require that you have a deposit of around about 20 per cent of the value of the home. If you do not have this and the bank of Mum and Dad is closed then you would have to get something that is called Lenders Mortgage Insurance. Lenders Mortgage Insurance (LMI) is a condition where your lender may require that you make a one-off payment to protect them against the event where you are unable to make your home loan repayments. It is there to protect the lender if there is a shortfall, meaning the proceeds from the sale of your home in the event that you’re unable to make repayments is not enough to cover the outstanding amount you owe to the lender. 
As a rough guide LMI would cost approximately $10,000 on a home loan of $500,000 for which you’ve saved a 10 per cent deposit or $50,000. This is $10,000 our of first home owners pockets that is put in place purely to protect the lenders although currently without it people are unable to secure a loan.
What is planning to change?
The Coalition has announced it will underwrite home loan deposits for first-home buyers who are unable to reach the 20 per cent that most lenders require. First home buyers will still need a minimum of a 5 per cent deposit but the government will provide the lender with a guarantee meaning there will no longer be the need for LMI, saving first home owners approximately $10,000 in costs. Labor has said they will match the policy.
This will mean that first home buyers will not have to wait as long before been able to secure a loan to get into their first home and will save money by not having to purchase LMI. It will mean that a house costing $400,000 would need a deposit of about $20,000 rather than $80,000. 
Who will it benefit?
It will benefit first home buyers earning under $125,000 who currently have a minimum 5 per cent deposit. It is also available to first home buyer couples (meaning neither individual has purchased a home before) earning under $200,000 collectively. The value of the homes that can be purchased will be determined on a regional basis so that it reflects the different property markets. 
If Labor is to be successful in the election on Saturday and they get their changes to negative gearing policy through the parliament it will be likely that buying property as an investment may become slightly less popular for wealthy investors due to the lack of tax incentives and therefore mean that buying a first home becomes easier. 
It is however limited to 10,000 loans a year initially, which is just 10 per cent of recent firs home buyers and you will still need to go through all the normal lending checks. 
What should first home buyers be doing?
There are a lot of new initiatives coming out or currently out at the moment that is aimed at helping first home buyers get their foot in the market. Now more than ever it becomes important to be informed about what is available to you as a first home buyer and make sure you are taking advantage of everything that is available as we are talking about savings potentially more than $10,000 on what is likely the biggest purchase of your life to date. 
Some of the initiatives such as the First Home Super Saver Scheme were first home buyers can contribute to super, claim a tax deduction and withdraw the funds when they are ready to buy a property are still widely unknown and not being utilised to their full potential so it is important that if you’re thinking of purchasing your first home then please do your research or speak to an adviser who can guide you through the process and make benefit of everything you have available to you. As always, if you have any questions feel free to email me or give me a call.

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Post Contributor:

Zac Masters | Financial Planner @ Pekada

Wealth Collective trading as Pekada (ABN 95 624 612 684), corporate authorised representative (CAR), number 1263725, is authorised to provide financial services on behalf of Communitas Wealth Pty Ltd.

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