On 1 January 2020 we saw the commencement of the Federal Government’s First Home Loan Deposit Scheme.  This scheme, limited to 10,000 participants per year, enables first time home buyers with small deposits to purchase a home without incurring loan mortgage insurance (LMI) costs. 

This is done by the government providing a guarantee through the National Housing Finance and Investment Corporation (NHFIC) to the lender against default by the borrower.  It does not absolve the borrower from their obligations to the lender to repay the home loan.  The full eligibility criteria can be found on the NHFIC web site but in summary the scheme is available/subject to:

• Individuals and couples who are all Australian citizens

• Have between 5% and 20% of the home purchase price as a deposit

• Earn maximum income per annum of $125,000 (individuals) or $200,000 per annum (couples)

• a purchase price threshold ($700,000 in NSW cities with population > 200,000 people, or $450,000 in the rest of the State)

• Owner occupiers only for the duration of the guarantee

Applicants must apply through a participating lender with guarantees being provided on first come first served basis.  To keep your place in the scheme your loan must be conditionally approved within 10 days and you must enter into a contract to purchase a property within 90 days.

Will the Scheme Affect the Housing Market?

According to the ABS, in the 12 months to November 2019 there were 108,431 lending transactions identified as being to first home buyers.  Offering assistance to 10,000 first home buyers, many of whom may have been included in that cohort anyway is unlikely to significantly affect the property market, if at all.  At best the scheme will enable a relatively small number of prospective purchasers to bring their house purchase plans forward but in most of these cases they could have purchased anyway (by paying LMI). 

So in effect, the scheme is a cash hand out to 9% of first home buyers each year.  In return they remain encumbered by the conditions of the scheme.  It remains to be seen how effectively the Guarantee system will operate and how quickly defaulting borrowers would be pursued by the government if their loan falls into arrears and the lender makes a claim against the Guarantee.

What If I Qualify Under the Scheme?

Prospective applicants will need to consider the following before participating in the scheme:

1. You are entering into a relatively risky transaction, particularly if you purchase in a falling market.

2. You must live in the property for the duration of the loan with the Guarantee.  For example, if you decide to rent out the property because you take a job in another region or State, then you will be required to refinance the loan at which time you may incur higher fees and charges than you would have originally, or worse still, be forced to sell your property.

3. Make sure you are ready to borrow – statistically people who borrow at high LVRs are much more likely to encounter problems with repaying their home loans.

4. If you buy without a substantial deposit you will be borrowing a higher amount, resulting in much higher interest costs over the term of the loan.

5. Beware lender’s First Home Buyer’s Specials.  Many of these loans are marketing gimmicks, providing cost benefits for a relatively short period of time before the loan reverts to a higher cost structure.  (these marketing plays are commonly deployed by the major banks).

6. You will not be free of the Guarantee, until you can refinance your loan outside the Guarantee scheme.  Depending on your own capacity to repay the loan quickly, and the vagaries of the property market this could take many years.

What If I Miss Out on Qualifying Under the Scheme?

First home buyers who either do not qualify or miss out on the scheme’s limited places should not despair.  In most cases you would be able to qualify for loan mortgage insurance which can be capitalised to the loan anyway.  While this introduces a (sometimes substantial) additional cost you will enjoy more flexibility than someone who borrows under the FHLDS.  Or you can wait until next year’s round of FHLDS funds become available – if the scheme is still in operation.

Summary

Overall, I do not think that the FHLDS will have a significant impact on the housing market.  It is available to a very small number of purchasers:  only 9% of first home buyers who comprise only 19% of the market overall.  For many the scheme will be totally irrelevant as either their savings, family income or the high cost of housing in the cities and regional centres just mean that they are not eligible.

Whilst the scheme will undoubtedly help a few people to lower their costs, there is also the risk that it introduces a new category of people to the risks of borrowing money and the housing market before they are ready.  Already some participating lenders are building marketing strategies around the scheme aimed at both successful and unsuccessful applicants. 

Prospective applicants will need to have a clear idea of their long-term goals as a change in circumstances could come at a significant financial cost. The major benefit of the scheme is that buyers can take out a low deposit home loan without incurring the cost of Lenders’ Mortgage Insurance, however, should they decide to move out, refinance, top up the loan they could face paying LMI. 

Fundamentally the scheme has been designed to appear to help first home buyers without contributing to a general fall in property prices, which would provide the most substantial benefit to all first home buyers.  But it did help the government to get re-elected and perhaps that is what the scheme was really designed to do!

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References

AHURI Brief (2019) Understanding the First Home Loan Deposit Scheme. Australian Housing and Urban Research Institute, © AHURI Limited.

Berry, M et al. (2010) Mortgage default in Australia: nature, causes and social and economic Impacts. AHURI Final Report No. 145. Melbourne: Australian Housing and Urban Research Institute, RMIT Research Centre.

Karp, P. (2019) First homebuyers' scheme: who gets it and will it work? – explainer. The Guardian.

Australian Bureau of Statistics (2019) Lending to households and businesses, Australia, Jul 2019 'Table 12. Lending to households for owner occupier first home buyers, number and value of commitments, original', time series spreadsheet, cat. no. 5601.0.

Barclay, J. (2020) Research finds FHLDS is not the solution to affordability crisis. MPA Magazine.

NHFIC. (2020). First Home Loan Deposit Scheme | NHFIC.

NHFIC. (2020). First Home Loan Deposit Scheme Frequently asked questions (FAQs).