The First Home Loan Deposit scheme provided by the Coalition has the potential to save first-home buyers a lot of time-saving up for a 20% deposit. However, taking this strategy could also lead to more expenses for the buyer in the long-term too.
When you get down into the real numbers that homeowners face on the first-home buyer scheme, you can see that the solution is a better solution than securing lender's mortgage insurance, but it could cost a lot more than the typical 20% deposit over the life of your home loan.
First home buyers need to consider the scheme carefully before they jump into it. The solution differs from the Labor campaign to improve housing affordability, as instead of lowering prices through tax reforms, it creates a faster way to buy, but costs homeowners more in the long-term.
What is the First Home Loan Deposit Scheme?
From the start of January next year (2020), the government has agreed to cover the cost of lender's mortgage insurance, for approved first-time buyers when they have a 5% deposit. Usually, high LVR loans can incur lenders mortgage insurance, which intended to protect the bank if the borrower can't repay their mortgage.
Although many people who don't have the money to pay a large deposit will simply accept the Lender Mortgage Insurance as part of their home loan, it's a lot of expense to take on. An entry-level property with a small deposit and no guarantor could lead to additional costs of about $17,000.
With the new scheme, around 10,000 first-home buyers would be able to access deposit support each year. This could mean that 109,000 first-home buyer loans are secured in the year. First-home buyers are approved for the scheme if they can get a home loan, save 5% of the value of the property, and they earn below a specific income. For instance, if you make less than $125k a year as a single, or $200k as a couple, you should be eligible.
The value of the property that you can buy under the scheme will also be limited according to region, but the details of this haven't been ironed out yet.
What you Need to Know About the Scheme
Most people would be happy to pay more for a big purchase if it means that they get the item sooner. This seems to be the draw of the first-home buyer deposit scheme too. Although you'll get to live in your home faster, you'll also be paying more through the life of your mortgage.
Research from Domain indicates that first-home buyers in Sydney could save themselves nearly 5 years by taking advantage of the scheme. If a buyer took on a mortgage with a 5% deposit and LMI, then they would end up paying more on their mortgage per month, and more for their loan overall. Additionally, they'd have the extra risk associated with taking out a larger loan to consider.
Even with the first-home buyer deposit scheme, there are several thousand extra dollars owed throughout the home loan. In other words, you save a lot of time, but you're paying for it in the long-term.
Other Issues to Consider
Many experts in the housing market suggest that people considering the benefits of the first-home deposit scheme need to weigh up the costs of a longer debt, and larger interest repayments, vs. the cost of renting. For instance, the LMI-free loan scenario would see the average first-home buyer spend about $53,000 extra on their home. However, this would probably add up to around two years of rent for an apartment in Sydney.
In this case, you'd probably spend a lot more on rent when trying to save up your deposit than you would by taking on the added interest. Of course, it's hard to know for certain how much anyone would pay on their rent over the time they would spend trying to save for a deposit. This is something you'll need to work out for yourself before deciding.
If you're planning on boosting your savings by living with parents before buying your first home, then the costs associated with rent might not apply to you.
Remember Capital Gains
One final point to remember when checking out this scheme is that lower deposits on your home also mean that you'll need to pay off more throughout your mortgage. If capital growth remains high for a period of time, however, then it could be beneficial to get into the market as soon as possible. If you're holding onto your property long-term, then the extra value you build in your house could soon make up for the extra cost of the loan.
The flipside of this is that at the time of writing, capital cities are seeing a decline in their property prices, which means that there's no money to gain. As prices are falling, the more time you spend saving, the easier it will be to get into a home with a big deposit, and less of a long-term debt.