What is the proposal?
Liberal has led, with Labour following, with the promise of a First Home Owners Scheme to help Australians live the dream of home ownership. The First Home Owners Scheme that was presented by Liberal leader Scott Morrison will see the possibility of First Home Owners using a guarantee from the National Housing Finance and Investment Corporation to assist with deposits and finance, allowing a 5% deposit to be all that is required for home ownership.
The scheme has similarities to the current family pledge/ family assistance lending that is available through a few lenders within the marketplace, where parents can assist their children to purchase a property using equity in their home.
By using a family pledge/ family assistance those with a limited deposit/ savings may avoid costs associated with high LVR (Loan to Value Ratio) loans like Lender’s Mortgage Insurance, similar to the proposed scheme by the major parties.
What is Lender’s Mortgage Insurance?
Lenders Mortgage Insurance or most commonly known as LMI is a percentage charge from the lender to the borrower based on loan to value ratio. The smaller your deposit as a percentage of your loan, the more LMI you will pay.
LMI is normally charged when a borrower exceeds 80% of the value of the security they are providing.
The most common misconception is that LMI covers the borrowers like other insurances, this is not the case. LMI covers the lender for the increased risk of default with higher loan to value ratio loans.
Like most insurances people are not always sure why they need it. With Lender’s Mortgage Insurance it gives the opportunity for those with minimal savings/ deposits to enter into the world of home ownership.
By purchasing a house with less than 20% deposit, buyers pay LMI, however, they get their foot on the property ladder. For many, saving a 20% deposit is not possible.
By saving for a deposit for a longer period to reach a 20% deposit, housing prices can move and government first-home owner grants can change, leaving your first home dreams even further away.
Incurring LMI and buying with a smaller deposit might be in the best interests of the borrower, helping them get into the property market earlier than otherwise would have been possible.
Who will the scheme benefit?
This incentive will impact the finance industry and be a great boost for those Australians that would like to get their foot in the door of home ownership, similar to how the First Home Owners Grant has assisted many Australians to date own their dream home.
However, how long will it take for the government to implement this scheme and at what cost may it come with? Will this scheme replace the current First Home Owners Grant incentive currently in play? With the scheme only having just been announced, details of how it will work are still in short supply.
What can you do?
If you would like to know more about current lending options that can assist first home owners or those with limited savings/ deposits please contact us to arrange a consultation with our dedicated finance department.
Our friendly and knowledgeable finance team have years of industry experience and will do all the work for you to help you achieve your financial goals.