Unpacking the First Home Loan Deposit Scheme

There's good news for first home buyers as one of the initiatives of the freshly elected Federal Government is the establishment of the First Home Loan Deposit Scheme (FHLDS). So, what's this all about?

In a nutshell

The FHLDS aims to help first home buyers purchase a home faster. Estimates suggest that it will reduce the time taken for first home buyers to save for a home deposit, by at least half.

For context, the national averages* for the time it takes an average-income couple to save a 20% home deposit, is 4.6 years for a median-priced house; or 4.2 years for a median-priced apartment.

If legislated, the FHLDS will help eligible first home buyers purchase a home with a deposit as low as 5%, by guaranteeing any shortfall in the 20% deposit that most lending institutions require for a home loan.

This means that eligible first home buyers will also avoid Lender's Mortgage Insurance, which on average can be around $10,000 (this can vary depending upon the loan to value ratio and the amount borrowed).

Below are some of the preliminary details that have been released. Basically, the FHLDS will :

commence on 1 January 2020 and operate under the National Housing Finance and Investment Corporation (NHFIC) - the NHFIC will partner with private lenders to deliver the FHLDS, prioritising smaller lenders to boost competition
Support up to 10,000 eligible first home buyer loans each year
be available to eligible first home buyers, i.e. those that have saved a home deposit of at least 5% up to 20% and income <$125,000 (single) or <$200,000 (couple combined, where both are first home buyers), based on their previous financial year's taxable income
target entry properties, with a maximum loan size determined on a regional basis
the guarantee will cease where borrowers refinance or their home loan ends
be able to be used in conjunction with the First Home Super Saver Scheme, as well as relevant State/Territory first home buyer grants and stamp duty concessions.

Please note: Lending institutions will still undertake their usual credit check processes (serviceability assessments) to ensure that borrowers are in a position to be able to afford the home loan repayments.

Lastly, it's important to understand that the FHLDS is still only a proposed measure, and legislation needs to be passed to make it effective; also, changes could be made to it, or it may be rejected.

Moving forward

Entering the housing market can be difficult, especially when considering the national averages for the time it takes an average-income couple to save a 20% deposit on a median-priced house or apartment.

If legislated, the FHLDS may be of benefit in this respect. However, it's important not just to consider the short-term gain that it intends to offer for eligible first home buyers.

For example, assuming a 5.5% interest rate, weekly repayment frequency and 30-year home loan term, the long-term implications of buying a $571,000 residential property with differing home deposits are as follows:

In this simple example, when compared to a 20% home deposit, a 5% home deposit could end up costing an extra $89,301 in interest over the life of a 30-year home loan. Also, there is the consideration with regard to the difference between the loan repayment amounts.

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