On 1 January 2020, the First Home Loan Deposit Scheme came into effect. It is one of the federal government’s initiatives to help first home buyers get a mortgage. If you have only saved a portion (specifically just five per cent) of the deposit for your dream home, this article is for you.
What is the First Home Loan Deposit Scheme?
The First Home Loan Deposit Scheme is essentially a way for first home buyers to secure the home they want to purchase with a five per cent deposit. The scheme eliminates the requirement of paying the mortgage insurance premium of the lender.
In essence, the First Home Loan Deposit Scheme will help you buy your first home sooner rather than later. Saving the home deposit is not easy, especially for average Australians. It is why the government and the Commonwealth Bank and the National Australian Bank (NAB) among others have joined forces to help the citizens become homeowners for the first time. Other small lenders also take part in this program.
The National Housing Finance and Investment Corporation (NHFIC) will take care of providing a guarantee for qualified individuals who receive low to middle incomes. This way, they can purchase their first home for as little as five per cent deposit. Additionally, the borrower does not have to take out lenders mortgage insurance or LMI.
According to the government, this scheme can give as much as $10,000 in savings.
The Commonwealth Government assures the savings, along with the 20% deposit threshold in which lenders typically require before a consumer can get a loan without LMI.
To understand better, here is an example:
The home that you would like to purchase is priced at $500,000. You have already saved $45,000 for it, which means you still have to provide at least $55,000 more to secure the home with the required deposit amount. It is a rule in Australia; otherwise, you will have to purchase the Lenders Mortgage Insurance to secure the home loan.
With the First Home Loan Deposit Scheme, you can avoid paying for the LMI as long as you have at least five per cent of the required deposit. In this case, you have saved up enough since you already have $45,000 for the house. The government guarantees the remaining $55,000 of your loan. Therefore, you have $100,000 for loan security, which is equivalent to 20% of the total property value.
Remember that the scheme does not cover government fees, including stamp duty.
If you are familiar with Family Guarantee, this scheme works similar to it. The difference is that the government functions as the loan guarantor instead of a member of your family.
There are already several stories surrounding the First Home Loan Deposit Scheme. It is vital to be aware of this program before you apply thoroughly. This way, you know its benefits and limitations, such as regarding cash payments.
Unfortunately, you cannot get cash out of the scheme. However, you can use it in conjunction with other grants from the government and programmes. Other waivers and concessions that you are qualified for, such as stamp duty concessions and First Home Owner Grant, can also be combined.
To sum it all up, here are the essential facts about the 2020 First Home Loan Deposit Scheme:
- If you have saved five per cent of the total price of the property, the government is willing to grant you the remaining 15%, as long as you are qualified for the scheme.
- One of the most notable limitations of this program is that up to 10,000 borrowers can only access it since its launch in January. However, the good news is that additional 10,000 spots will soon be open starting July this year.
- With this scheme, you do not have to worry about the LMI at all. Still, you are required to borrow 95% of the total amount that you need for purchasing the house.
- The mortgage that you should get has to be in the form of an “owner-occupied” loan. It should also come with principal and interest repayments.
- There are a few requirements to watch out for before you try applying for this scheme. One of the most significant facts that you should know about is that only those who earn less than $125,000 will be qualified.
- If you apply as a couple, you cannot earn more than $200,000 together.
Finally, there are property value caps that apply. Therefore, aside from qualifying from the loan based on your income, the home you wish to purchase should also be eligible. Its value will be determined whether the house fits the scheme, which will depend on the state and city you are in.
For instance, in Western Australia, the property value cap is $400,000 in the capital city and regional centres, while the rest of the state is $300,000 only. In New South Wales, you can borrow for a property that is worth up to $700,000 in Sydney and $450,000 for the other parts of the state.
Should You Apply for the 2020 First Home Loan Deposit Scheme?
If you take a good look at the program, it is easy to conclude it is beneficial to Australians. Many agree as several banks confirmed that about 3,000 potential homebuyers lodged their application since 1 January.
The remaining 7,000 started piling in from February as applicants sent the required documents to one of the 27 participating lenders.
The low deposit home loans become cheaper, and the NHFIC guarantees the loan, along with small and big lenders, including:
- Australian Military Bank
- Bank Australia
- Bank First
- Commonwealth Bank
- Defence Bank
- Indigenous Business Australia
- MyState Bank
- National Australian Bank
- Regional Australia Bank
- Teachers Mutual Bank
- WAW Credit Union
With a little bit of research, you can quickly compare the offered loans from lenders that are currently participating in the scheme. You can directly contact the lender through their website to gain the information you require.
For example, with the Commonwealth Bank, you need to first check your eligibility before making an appointment. Then, the meeting will be booked. Note that the reservations are limited. You may have to wait until the second batch of qualified borrowers can start with the appointments from 1 July 2020.
The Commonwealth Bank requires the borrower to provide all the needed documents as part of the requirements ready to start the application process. The home should also be purchased within 90 days once the approval is granted.
The application is typically easy if you understand the conditions. Aside from the hassle-free process, here are the other reasons why you may want to apply for this scheme:
- You can get the home you want sooner. You do not have to wait until you have 20% of the total cost of the property. Therefore, you save a quarter of the time needed to get the minimum required deposit.
- You do not have to pay for the LMI. These premiums can cost thousands of dollars, but you can avoid them, thanks to this scheme.
- You can purchase any type of property you wish. Unlike other first homeowner grants, this scheme is not limited to purchases involving newly-built homes or even off-the-plan acquisitions. Therefore, you can buy almost any property type you want, such as an apartment, townhouse, land and home package, or a single existing house.
- The biggest benefit lies in property prices. If the cost of the properties in your area is on a steady increase, this scheme becomes incredibly appealing. As the property rises in value when you are paying off the loan, you already gain equity – even if you keep paying higher interest.
You can continue saving for the house if you want to provide the 20% deposit. However, if the property prices keep rising, your savings will never be enough as you try to keep up. You can benefit from the scheme now; otherwise, you could get stuck in the saving process.
Are You Eligible for the Scheme?
Not everyone can benefit from this scheme, though. You can only apply if you meet the following requirements, according to the NHFIC:
- You should be an Australian citizen and not just a permanent resident.
- You should be at least 18 years old.
- It is the first time you will be buying a property. If you already have a commercial property but not a residential one, you will still be ineligible.
- Your income does not exceed $125,000 yearly.
- You have five per cent of the deposit ready.
- If you are married, you and your spouse should not earn more than $200,000 per year. Applying as a couple requires that you are either married or in a de facto relationship.
- You lodge your application before all the 10,000 spots are filled. You can re-apply in July to be a part of the remaining 10,000 qualifying candidates.
You cannot apply with your sibling or friend for this scheme. It is also critical that you understand the repayment terms. Home loans are typically under the principal and interest repayment scheme for the whole life of the loan. The First Home Loan Deposit Scheme works the same as the others.
However, if you opt to purchase empty land where you plan to build the house, it is possible for you to apply for an interest-only loan for a particular period. Be sure that you talk to your lender to understand the available repayment options you currently have.
Aside from meeting the criteria above, the type and value of the home or land you wish to purchase should also fit the existing guidelines of the scheme. Even though you can buy almost any property, including new and existing ones, it must meet the price caps depending on the state, capital cities, and rural areas.
Steps on How to Apply for the First Home Loan Deposit Scheme
If you believe that you meet all the requirements stated above, you can proceed to the application process. You can apply directly with any participating lender, such as the NAB and the Commonwealth Bank. More prominent lenders have started accepting applications starting the first day of the year while smaller ones have begun receipt of submissions from 1 February 2020.
While the NHFIC provides the guarantee for the scheme, you should never send your application directly to the agency.
Now that those details are out of the way, you can continue with the other steps:
Talk to the Lender That You Wish to Borrow From
Take a look at the lenders listed above. You have about 27 lenders to choose from, which were named by the National Housing Finance and Investment Corporation in 2019. NAB and CommBank are the only huge banks in this scheme, but you have 25 more to go to if you do not qualify from these two.
Reserve Your Spot in the Scheme
The bank or lender will tell you whether or not you get approved. Be prepared to have your eligibility assessed, which will generally take a few weeks. If you are qualified, a representative of the lender will inform you of your reserved spot.
Get Pre-approved Right Away
Once you have earned your place in the scheme, you should be ready to sort your budget out. The lender will usually give up to 10 days for you to get pre-approval on the home loan. From here, you will know how much you can borrow from the lender. Then, you can establish the amount that you will have to spend on the property you wish to purchase.
Buy the Property
Banks will give you up to 90 days to settle on a house and purchase it. Again, make sure that it meets the price cap of your state and city.
Move Into the Property
You are required to live in the property within six months of purchasing and getting the home loan.
Mortgage products are not always the same. Some lenders may offer you lower application fees while others will ask for settlement fees right away. Ask a lot of questions before you choose the lender. Quantum Finance can also assist you in finding the most suitable lender for your needs and budget. Contact us for more information.