First Home Loan Deposit Scheme: What first home buyers need to know

author-avatar By on January 10,2020
First Home Loan Deposit Scheme: What first home buyers need to know

Photo by Priscilla Du Preez on Unsplash

Launched on 1 January 2020, the First Home Loan Deposit Scheme could offer hopeful first home buyers a much-needed leg up onto the property ladder.

The Federal Government’s First Home Loan Deposit Scheme can help eligible first home buyers secure a home loan with a deposit as little as 5% by guaranteeing up to 15% the value of the home and saving them from the dreaded multi-thousand-dollar cost of Lenders Mortgage Insurance (LMI).

When Prime Minister Scott Morrison announced the scheme just before the May election, it was met with criticism. Some economists and real estate experts said the scheme could put upwards pressure on house prices and that it may increase the risk of negative equity.

Regardless, first home buyers have been patiently awaiting the scheme’s launch since it was announced. If you’re one of them, here’s what you need to know about the First Home Loan Deposit Scheme.

Looking to compare low-rate, variable owner-occupier home loans? Below are a handful of low-rate loans in the market.

Provider
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
 
2.68% 2.74% $1,618 More details

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 01 June 2020. View disclaimer.

What is the First Home Loan Deposit Scheme?

The First Home Loan Deposit Scheme is an Australian Government initiative designed to assist Australians in entering the property market sooner.

For example, if a first time buyer using the scheme has saved only 5% of the value of a property, the government can essentially act as a guarantor for 15%, thereby providing the buyer with the 20% security typically required to be approved for a home loan without having to pay for LMI.

It’s important to clarify the guarantee is not a cash payment to the first time buyer. Rather, it’s like a promise from the government to the buyer's home loan lender that should the buyer fail to repay their home loan, the government will pay the lender the guaranteed amount (15% in the above example).

The guarantee will be limited to 10,000 loans each year to first home buyers on a first-in, best-dressed basis, and only applies to owner-occupied loans with principal and interest repayments.

The scheme is being administered through the National Housing Finance and Investment Corporation (NHFIC) in partnership with lenders.

In a statement, Prime Minister Scott Morrison said, “The NHFIC will partner with private lenders to deliver the First Home Loan Deposit Scheme, prioritising smaller lenders to boost competition.”

Support will stay in place for the life of the loan. If the borrower decides to refinance to a new loan or lender, the guarantee will end.

First home buyers are able to use the scheme in conjunction with other first home buyer benefits, such as the First Home Super Saver Scheme and state or territory first home buyer grants and stamp duty concessions.

Who is eligible for the First Home Loan Deposit Scheme?

Only Australian citizens (not permanent residents) are eligible for the scheme.

An income threshold will apply. Singles with a taxable income of up to $125,000 a year, and couples with a joint income of $200,000 are eligible provided it’s their first home loan and they are both first home buyers.

Couples must be married or in a de facto relationship. Other people buying together such as friends, siblings, parent/child and so on cannot apply for the scheme together.

Applicants must have at least 5% of the value of the property saved. Applicants also must intend to buy the property and move into it as their primary place of residence (so they must be owner occupiers, not investors).

If you’re still unsure, you can take a quick quiz on the NHFIC’s website to see if you’re eligible for the scheme.

Will first home buyers pay a higher interest rate under the scheme?

Not according to the NHFIC, which states participating lenders in the scheme will not charge eligible customers higher interest rates than those not participating in the scheme.

It’s worthwhile keeping in mind that taking out a home loan with a smaller deposit means paying interest on a larger amount of money, which could make the loan significantly more expensive.

What types of property can I buy under the First Home Loan Deposit Scheme?

According to the NHFIC, an eligible first home buyer can purchase any of the following property types under the scheme:

  • A new or existing house, townhouse or apartment
  • A house and land package
  • Land together with a separate contract to build a home
  • An off-the-plan apartment or townhouse

Property price caps

To make sure the scheme is only available for the purchase of an entry-level home, property price caps will apply. These price thresholds will be different in the various states and territories to reflect the different median house prices.

If you’re still unsure, you can enter your postcode on the NHFIC’s website to find out what the price threshold is for your area.

Which lenders are taking part in the First Home Loan Deposit Scheme?

There are 27 lenders taking part in the scheme, comprised of two ‘big four’ lenders and 25 non-major lenders.

The two major lenders will get a head start in the application process, with approval to offer loans from 1 January 2020. The remaining 25 non-major lenders will be able to take applications from 1 February 2020.

The two major lenders will be allocated half of the 10,000 loans, with the remaining 5,000 going to the remaining 25 non-major lenders.

According to the NHFIC, the following lenders will take part in the scheme:

Major bank lenders:

Non-major lenders:

  • Australian Military Bank
  • Auswide Bank
  • Bank Australia
  • Bank First
  • Bank of us
  • Bendigo Bank
  • Beyond Bank Australia
  • Community First Credit Union
  • CUA
  • Defence Bank
  • Gateway Bank
  • G&C Mutual Bank
  • Indigenous Business Australia
  • Mortgageport
  • MyState Bank
  • People’s Choice Credit Union
  • Police Bank (including the Border Bank and Bank of Heritage Isle)
  • P&N Bank
  • QBANK
  • Queensland Country Credit Union
  • Regional Australia Bank
  • Sydney Mutual Bank and Endeavour Mutual Bank (divisions of Australian Mutual Bank Ltd)
  • Teachers Mutual Bank Limited (including Firefighters Mutual Bank, Health Professionals Bank, Teachers Mutual Bank and UniBank)
  • The Mutual Bank
  • WAW Credit Union

Can the First Home Loan Deposit Scheme be combined with other government incentives?

First home buyers can use the scheme in conjunction with other first home buyer assistance available from state and territory governments.

The First Home Owners Grant (FHOG) is a national scheme which differs in each state and territory and in most places applies to new homes only.

Will the First Home Loan Deposit Scheme work?

Experts appear to be divided on this.

Avoiding costly LMI and being able to get into the property market sooner will clearly be beneficial for first home buyers.

But many housing and economic experts are dubious the scheme will work.

Grattan Institute household finances program director Brendan Coates doubts the scheme will be effective given that it’s only available for a limited number of first home buyers each year.

“Ultimately it’s going to be pretty ineffective. It’s only 10,000 guarantees a year, so that’s a drop in the ocean really, compared to the problem of housing affordability for younger, poorer Australians,” Mr Coates said.

“It’s essentially a lottery for those that do get access to this scheme. Because it allows them to borrow more without having to pay lenders mortgage insurance - saving them up to $10,000 - so it’s likely to be much more demand for the scheme than the 10,000 places that are available.”

There’s an understatement. Data from the Australian Bureau of Statistics (ABS) shows there are just over 110,000 loans to first home buyers each year - 11 times the amount of places available. Just over 10,000 first home buyers entered the market in October 2019 alone.

CoreLogic’s Head of Residential Research Australia Eliza Owen said the scheme’s income thresholds of up to $125,000 for singles and $200,000 for couples is too high.

“Under the FHLDS, high income earners are being offered the same advantage as lower-income earners,” she said.

“An individual on $125,000 a year sits above the 80th percentile of full-time workers. The median pre-tax income for an individual in Australia is about $78,000.

“In other words, a wage of $125,000 is in the top 20% of full-time workers. The median pre-tax income for an individual in Australia is about $78,000.”

Because of that, Ms Owen said the scheme could actually provide more advantage to those earning towards the top of the threshold.

“That is because they can save a 5% deposit more quickly, and the scheme is currently limited to 10,000 guarantees a year, awarded on a ‘first in, first served’ basis.”

The advantage high-income earners have in this scenario is demonstrated in the figure below.

corelogic household income chart

Source: Corelogic

On top of the income threshold being too high, Ms Owen also said the scheme only targets individual woes rather than addressing the issue of housing affordability generally.

“Introducing a high income threshold for a program with limited numbers could make it more regressive,” she said.

“10,000 guarantees represents a small portion of FHB demand, where 10,857 new FHB loan commitments were made in October alone.”

A 5% deposit would cost more in interest than a 20% one, while the extra interest paid over the life of the loan could have gone to renting while building up a deposit, according to Ms Owen.

“The FHLDS, in its current state, risks awarding home ownership to those who may have otherwise attained it with time,” she said.

What are the risks involved in getting a low deposit home loan?

There are risks to weigh up before applying for a home loan with a low deposit, which include:

  • A lower deposit means the borrower is taking on more debt and could end up paying significantly more in interest as a result.
  • Having a lower deposit may limit the lenders and loans you’re eligible for. You could miss out on some of the more competitive interest rates out there for borrowers who have a bigger deposit.
  • A smaller amount of equity in your home from the start could make refinancing harder, especially if house prices fall.

Vice-chancellor research fellow at the University of Tasmania Saul Eslake said the scheme could encourage more people to take out 95% loan-to-value-ratio (LVR), which can be risky, especially when house prices are falling.

“There’s a risk that someone who enters this scheme may find themselves in a negative equity position,” he said.

On the other hand, head of property market research at Propertyology Simon Pressley told Savings.com.au the scheme is a “wonderful initiative to help first home buyers”.

“I’ve always been critical of the so-called ‘First Home Owners Grant’ which is really just a construction grant for new homes and mainly benefits developers,” he said.

“This is a genuine first home owners grant and someone contemplating that life-changing decision now has a genuine date and call to action to break themselves into the property market.”

How do I apply for the First Home Loan Deposit Scheme?

Prospective first home buyers can submit applications directly through the participating lender of their choice. The NHFIC will not be accepting applications directly.

On 17 December 2019, NAB opened a waitlist for prospective first home buyers hoping to secure a spot early.

Savings.com.au’s two cents

It’s a real dilemma for budding home buyers: buy now, or wait and save more?

If you’ve scrimped and saved at least 5% of the purchase price of the property you want to buy, the First Home Loan Deposit Scheme could solve that dilemma for you. With house prices likely to keep rising in 2020, it could make sense to take advantage of the scheme and get into the market now.

However, it’s important to think about the risks involved with taking out a low deposit home loan, namely the risk of financially overcommitting yourself.


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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author-avatar
Emma joined Savings.com.au as a Finance Journalist in 2019. She is a journalist with more than five years experience across print, broadcast and digital media, with previous stints at Style Magazines, 4ZZZ radio, and as editor of The Real Estate Conversation. She's most passionate about improving the financial literacy of young women and millennials by writing about complex financial topics in a way that's easy for the average Joe (or Jill) to understand. When she's not writing about finance she's watching Greys Anatomy (again).

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