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Starting on January 1 next year, Australian First Home Buyers will be able to take advantage of the $500million First Home Loan Deposit scheme which will allow for the purchase of a home with just a 5% deposit, without incurring the cost of lenders mortgage insurance.

 

Buyers stand to save thousands of dollars by avoiding LMI which insures the bank against the risk of taking on borrowers with smaller deposits.

 

Basically borrowers with smaller deposits have a higher risk of defaulting and pay LMI to insure against that risk. With this scheme, the need for LMI is removed.

 

Here’s how it works.

 

  • If you’ve saved 5%+ of the price of your property then the government will guarantee the rest of the 15% up to the 20% needed to avoid LMI.

 

  • Your loan size will still be the save.

 

  • You must be buying an owner-occupier loan with principal and interest payments.

 

  • You aren’t earning over $125,000 as an individual or $200,000 as a couple.

 

  • Only 10,000 people can make use of the scheme. Last year there were 110,000 first home buyers. So less than 1 in 10 will be able to take advantage of the scheme.

 

  • The scheme is on a first come, first served basis. 

 

  • The value of the property that can be purchased varies by state and region.

 

The scheme will make home deposits cheaper; if you’re lucky enough to be chosen.

Each State/Territory has its’ own price limits on which properties can be purchased.

 

State/Territory Capital city/regional centre* Rest of state
NSW $700,000 $450,000
VIC $600,000 $375,000
QLD $475,000 $400,000
SA $400,000 $250,000
WA $400,000 $300,000
TAS $400,000 $300,000
ACT $500,000 $500,000
NT $375,000 $375,000

 

So, will it really help First Home Buyers?

 

Experts are split. Avoiding LMI certainly speeds up the purchase of the property.

But the loan size is still the same. Buying with a smaller deposit means you will pay interest over the term of the loan. And your repayments might be higher given you are borrowing more money than would have been the case if you had been forced to save a 20% to avoid LMI.

 

Having negative equity is also a risk if property prices go down. This can make it harder to sell or refinance a property.

 

Prime Minister Scott Morrison has promised it would help Australians get their “first leg on the first rung of the ladder.” 

 

Brendan Coates at the Grattn Insitute believes that “Ultimately, it’s going to be pretty ineffectual.”

 

“It’s only 10,000 guarantees a year, so that’s a drop in the ocean really, compared to the problems of housing affordability for younger, poorer Australians.”

 

Some would argue that Lender’s Mortgage Insurance exists for a reason and that bigger loan sizes in having 95% owing on your mortgage is not positive for first home buyers. 

 

Others point to previous schemes of this type which have increased the competition between buyers of houses priced at the bottom end. A large number of first home-buyers end up competing for a limited number of homes.

 

The scheme is certainly one that has captured the imagination of those looking to enter the housing market. Whether it makes it a difference or not; only time will tell. 

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