How the new First Home Loan Deposit Scheme works

First home buyers will soon be able to apply for the Federal Government’s new First Home Loan Deposit Scheme (FHLDS) with legislation passing earlier in October. The scheme will help many first-time buyers from January 2020.

What is the First Home Loan Deposit Scheme?

The FHLDS is a new government scheme to assist first home buyers in purchasing a property with a deposit as low as five per cent.

Most home buyers will aim to save 20 per cent to avoid the major expense of lenders mortgage insurance (LMI). With the new scheme, the government will act as the guarantor for the remaining amount.

The main benefit of the scheme is first home buyers can get into the market sooner while avoiding thousands of dollars in insurance premiums.

Who is eligible?

New buyers will need to meet an income test based on their previous year’s taxable income. To be eligible for the scheme, you must meet one of these criteria:

• Single first home buyers with a taxable income up to $125,000.
• Couples with a combined taxable income up to $200,000.

When does the scheme begin?

With legislation passed, the scheme is set to begin January 1, 2020.

The Government indicated the scheme works on a ‘first-in, best-dressed’ basis, supporting the first 10,000 home buyers. Keep in mind, about 110,000 Australians bought their first home last year. This means we can expect spots to fill up quickly as the scheme only supports roughly 10 per cent of all first home buyers.

The National Housing Finance and Investment Corporation is responsible for the $500 million scheme and is in the process of lender selection.

Property price limits

Besides the income test, there are property price caps supporting entry-level properties. Location determines the maximum loan size to reflect the difference between property markets.

For example, capital cities such as Sydney and Melbourne will support property values up to $700,000 and $600,000 respectively. Price thresholds for capital cities will also apply to large regional centres with populations over 250,000, such as Newcastle, Lake Macquarie, the Illawarra (Wollongong), Geelong, the Sunshine Coast, and the Gold Coast.

Can I use other government schemes?

Yes, you can. The Government confirmed in May first home buyers can use the Loan Deposit Scheme in conjunction with the First Home Super Save Scheme and any other state or territory first home buyer grants and stamp duty concessions available.

This could create some nice entry-level sweet spots for new buyers. For example, if you buy at $650,000 in Sydney or Wollongong at a five per cent deposit, you not only avoid LMI, but you also pay zero stamp duty.

If you’re in Victoria, you could buy a $600,000 property in Melbourne or Geelong with a five per cent deposit and pay zero stamp duty and no LMI.

Is the scheme worth it?

The scheme will benefit those who are looking to get into the market earlier, but this will come at a cost. A lower deposit means the borrower will pay more interest over the life of the loan. Those who want to apply for help will need to work out if it is worth it.

Getting in early is far more beneficial when the property market is going up, but there is a risk of borrowers ending up in negative equity. If the market declines, first home buyers run the risk of the mortgage being greater than the property value.

Everyone’s situation is different. It’s a good idea to speak with your mortgage broker to get advice surrounding your finances before you act.

Key points to remember about the FHLDS:

• Begins in January 2020.
• Granted on a ‘first-in, best-dressed’ basis.
• There are property price caps based on regions.
• Beneficiaries receive support for the life of the loan or until refinanced.
• Guarantees up to 10,000 first home buyers to get a loan with a deposit of five per cent.
• Expect more announcements about lenders and applications in December 2019.

What to expect

From January onward, we should see an uptick in the number of first home buyers entering the market to take advantage of the new scheme. As a result, don’t be surprised if property prices trend upwards as demand increases.

The scheme will be a big help for first home buyers that want to get into the property market earlier than before. Plus, interest rates are at record lows. But remember, getting into the property market should come down to your own situation.

If you’d like more information to understand the process, property laws, finance, and other schemes, take a look at Successful Ways’ First Home Buyers Course.