When thinking about purchasing your first home, the first hurdle is usually saving up a deposit. In order to avoid lenders mortgage insurance, prospective home owners will typically need to put away a minimum 20% deposit, which in Victoria’s housing market can often be a difficult uphill slog. However, under the new federal government First Home Loan Deposit Scheme, eligible applicants could be poised to purchase their first home with a deposit as low as 5% of the purchase price. The scheme was announced prior to the 2019 federal election and has rolled out nationwide as of January 1st 2020.
Applicants must be Australian citizens of at least 18 years of age, earning less that $125,000/year for singles, and less that $200,000/year for couples. Applicants must be owner occupiers who have not previously owned or held an interest in Australian property. However, the scheme excludes couples who are not married or in a de facto relationship, meaning young people hoping to access the scheme in tandem with a parent or sibling will be excluded. The scheme is also closed to permanent residents of Australia- only Australian citizens are eligible to apply. Finally, the scheme will only be available for up to 10,000 successful applicants nationwide each financial year- approximately 10% of the first home buyer market.
Applicants must have at least a 5% deposit saved, however those who have saved a deposit of 20% or over will be excluded. This is an interesting metric, considering that eligible properties under the scheme cap at $600,000 for metropolitan Melbourne ($375,000 for rural Victoria), and poses the question whether someone who has saved a 20% deposit for a $300,000 property might be able to use the scheme to invest in a $600,000 property instead without any additional deposit saved.
This leads into one of the major criticisms of the scheme. Unlike the first home owners grant, the scheme is not a cash handout. Instead, the scheme allows a purchaser to obtain a loan for a specific property through a private lender with up to 15% of the property guaranteed by the federal government- comparable to how a purchaser may use support from a parent or relative as a guarantor on a property to avoid lenders mortgage insurance. Applicants will still be required to meet the conditions of their loan and service the required payments and interests, leading to criticism that the scheme may prompt people to bite off more than they can chew, and become burdened with a loan they cannot afford at a time when household debt has never been higher. Furthermore, a smaller deposit means a larger loan with a longer life, which over time means more money paid in interest, potentially cancelling out the benefit of a smaller initial deposit.
The high income caps have also come under criticism, with the argument being made that a single person earning $125,000/year is in a very different financial situation to someone earning $40-50,000/year, and yet the scheme puts them into the same category. Finally, the scheme has been criticised for addressing only a symptom of a larger problem, namely, the reason people struggle to save a 20% deposit for a home is by and large due to the enormously inflated cost of housing overall. Merely getting over the first hurdle does little to address the problem at it’s root, and in fact may lead to further market inflation. Lenders have also come under fire with reported allegations of hiking up interest rates for first home buyers under the scheme. Finally, considering the scheme was announced the week before the election, some critics have labelled the scheme ‘tokenistic’, designed for political gain first, with less regard for the long term impact on both individual participants, and the broader outlook of Australia’s housing market.
At the end of the day, like any major financial decision, it’s well worth scrutinising the positive and negative aspects in detail. While these kinds of government schemes may well be a much-needed boost for those who have been struggling to get onto the property ladder, taking ones personal circumstances and long term goals into account is the best way to fully take advantage of the pros, without being overly burdened with the cons. The scheme is currently available through CBA and NAB, with small lenders set to begin taking applications from February 1st.
By Georgia Wilby
