First Home Buyers Listen up!

We’re breaking down what the first home buyer deposit scheme is and the things you need to know if you’re considering applying for it!

If you are a looking to purchase your first home in the near or not so near future, we understand that it can be a confusing and confronting process; especially when new government schemes are introduced and critically analysed by most media outlets, creating an influx of overwhelming information to be on your radar.

At Donovan Oates Hannaford, we believe that no information is effective if it can’t be easily understood. Therefore, in this blog we’ll be breaking down the First Home Buyer Deposit Scheme and flagging some key things you might want to bear in mind if you’re thinking of applying.

What is the First Home Buyer Deposit Scheme?

In the recent 2019 election, the Morrsion Government announced they are helping first home buyers enter the Australian housing market by buying their first home through the ‘First Home Buyer Deposit Scheme’ starting January 1^st, 2020.

The scheme seeks to address the issue of housing affordability and encourage more buyers into the Australian housing market through reducing the amount of time it takes for the average Australian to save for their deposit (typically 9 to 10 years) and reducing the size of the deposit required.

How it works:

• If you have a minimum of 5% saved of your properties’ purchase price (compared to the usual 10-20%), the Government will act as guarantor for the remaining 15%.
• The Government plans to invest $500 million worth of equity to guarantee these deposits with smaller lenders being prioritised to help boost competition.
• Scheme will only be available for 10,000 people annually.
• The Scheme will work alongside the First Home Super Saver Scheme; which allows you to save money for your first home inside your superannuation fund.

What are some benefits and who is eligible?

• Eligible first home buyers will be able to purchase a house with a deposit as low as 5%.
• First home buyers could save around $10,000 in Lenders Mortgage Insurance under the scheme.
• Scheme will allow buyers greater access to Australia’s housing market and overcome tighter lending barriers from financial institutions.
• First home buyers with an income of up to $125,000 (or $200,000 for couples) will be eligible and the value of eligible homes will vary per region.

(Source: Helping Australians Buy Their First Home Media Release)

 What are some potential risks/things you should be aware of?

Whilst the scheme will provide some hope to first home buyers, over the long term it mightn’t stand as the best option for you with the interest repayments being significantly higher. See the below example for a $500,000 property.

WITHOUT SCHEME:
Home Value = $500,000
Deposit (20%) = $100,000
Mortgage = $400,000
Mortgage Term = 30 years
Interest Rate = 3.81%*

Total Interest = approx. $271,000
Total Repayments = approx. $671,000

WITH SCHEME:
Home Value = $500,000
Deposit (5%) = $25,000
Mortgage = $475,000
Mortgage Term = 30 years
Interest Rate = 3.81%*

Total Interest = approx. $320,000
Total Repayments = approx. $797,000

*Current average interest rate as at August 2019.
*Fees over the mortgage may also apply.

(The above example was created using the ATO’s mortgage calculator and the average industry interest rate for August 2019 from Bank Rate.)

Therefore, over the course of a 30-year loan, the interest repayments will be far higher for those who provide a 5% deposit than those who provide a 20% deposit. Fluctuations in interest rates is also a factor that will need to be considered.

Additionally, some economists predict that the scheme has the potential to increase housing prices as historically, increases in demand for housing tends to increase property prices upwards.

3 key takeaways:

With all that said, here are the three takeaways from our round up of the First Home Buyers Deposit Scheme:  

1. The scheme does give some hope to first home buyers as it is breaking down some barriers to entry into the Australian property market.
2. First Home Buyers, don’t stretch yourself financially with the price of your home as interest rates may fluctuate and impact your monthly repayments.
3. All buyers, be wary of the additional costs over the term of the mortgage.
4. Bonus tip: When staying up to date on the latest first home buyer news, make sure you refer to reputable sources such as the Australian Tax Office.

If you would like to discuss any issues you may have with respect to conveyancing, please contact Donovan Oates Hannaford on 02 6583 0400 or info@dohlaw.com.au.