First Home Buyers Listen up!

By Scott Williams

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 Scott Williams on 02 6583 0427 or swilliams@dohlaw.com.au.