Good News For First Home Buyers
There was good news for first home buyers recently, with the Government’s ‘First Home Loan Deposit Scheme’ being passed through both Houses of Parliament. The scheme was originally announced in the 2019-20 budget earlier this year.
Currently, where a home loan exceeds 80% of the value of the property (known as the Loan to Valuation Ratio or ‘LVR’), lenders will typically charge the borrower a premium for Lenders Mortgage Insurance (‘LMI’) which covers the lender in the event of the property falling in value. LMI premiums can add thousands of dollars to the purchase process, and are often the difference between a borrower being able to proceed with the purchase or not.
Under the First Home Loan Deposit Scheme, eligible borrowers who have at least 5% of the purchase price of the property will have the remaining 15% of the deposit guaranteed by the government, meaning they won’t need to take out an LMI policy. Borrowers will still need to borrow the remaining 95%, but the absence of LMI will typically make the purchase more affordable and achievable.
The key criteria of the scheme are as follows:
- Borrowers must be first home buyers
- The mortgage needs to be an owner-occupied loan with principal and interest repayments
- Eligible borrowers can’t be earning more than $125k a year ($200k combined for couples)
- Access to the scheme will be limited to 10,000 borrowers each year
- The value of eligible homes varies from state to state, region to region (e.g. $600k for Melbourne & Geelong, $375k for the remainder of Victoria)
The scheme will be monitored by the National Housing Finance & Investment Corporation, in conjunction with selected lenders. The government has indicated that smaller ‘non-major’ lenders will be favoured to boost competition.
So, will this scheme be effective? Experts are split.
There will certainly be cases where the absence of an LMI premium is the difference needed for a purchase to be viable. However, limiting the scheme to 10,000 borrowers will reduce its effectiveness, bearing in mind that 8,000 first home buyers took out mortgage in March 2019 alone. Some industry experts also claim that the low maximum values in some markets further restricts borrowers options too much.
Overall though, it would seem that any sort of ‘leg-up’ for first home buyers in an overheated property market can’t be a bad thing.
If you or a family member are in the market for your first home, speak to our mortgage expert here at BCV for more information.