Understanding the First Home Loan Deposit Scheme
Targeted ‘low deposit’ support loans could help first home buyers
Last updated 30 May 2019
The Australian Government has outlined the First Home Loan Deposit Scheme to support first home buyers who are struggling to save the large deposits (usually around 20% of purchase price) required to buy a house.
The First Home Loan Deposit Scheme is similar to an existing policy of the New Zealand Government, the Welcome Home Loan. Under this NZ loan scheme, a household obtains a loan from a participating bank or other lender and Housing New Zealand underwrites the loan. Householders need a 10 per cent deposit; can buy a house that costs no more than the maximum price for each region; and have an annual income before tax of no more than $85,000 per year for a single person and $130,000 for a couple.
The Australian First Home Loan Deposit Scheme has different eligibility restrictions, including a lower 5 per cent deposit requirement; higher annual income cut offs of $125,000 for a single person and $200,000 for a couple; and a cap of a maximum 10,000 first home buyers being able to access the scheme each year.
Other low-deposit loan schemes already exist in two Australian states: Keystart (in Western Australia) and HomeStart (in South Australia). These programs were established by the state governments in response to the lack of affordable finance options for low income home buyers. Keystart and HomeStart home loans are secured by their respective state governments, with both organisations paying a dividend back to their state government.
Keystart and Homestart both have strict eligibility requirements. For example, to be eligible for a home loan with HomeStart you must:
- have a regular income, which can include centrelink benefits
- be over 18 years of age
- be an Australian citizen or hold Permanent Residency or skilled migrant status in Australia
- be purchasing an established home within South Australia to live in (i.e. with restrictions to not rent out at any time in the future)
- have a clear credit history
- have $3,000 of savings held for at least three months, have no paid or unpaid defaults, court judgements or history of bankruptcy.
Eligible home buyers only need a deposit that is three per cent of the purchase price, although this depends on where the property is located. Lenders’ Mortgage Insurance (LMI), which is paid to protect lenders in case the borrower defaults on their loan, is not required, instead HomeStart has a Loan Provision Charge (LPC), which costs significantly less for most customers. HomeStart suggests that for a $380,000 loan on a $400,000 property (being a loan of 95% of the home’s value), customers would pay $1,425 for the LPC rather than around $13,5000 for LMI.
Interest rates (in May 2019) for a 3 year fixed rate HomeStart loan are 5.43% (comparison rate). As a comparison, a 3 year fixed rate loan from a major bank requiring a much higher 20 per cent deposit was 4.98% (comparison rate). A comparison rate includes the interest rate as well as certain fees and charges relating to the loan.
The benefit of a HomeStart loan is that it can get lower income households into the property market and then, once they have built up sufficient housing equity (e.g. greater than 20% of house value), they are encouraged to apply for a loan (at a lower interest rate than that offered by HomeStart) from a bank or building society and pay out their HomeStart loan.
The Keystart Low deposit home loan (comparison rate 5.43%) imposes eligibility restrictions on the maximum income householders can earn, and places a cap on how much householders are able to borrow. No government subsidies are made to Keystart and it has not required ongoing government financial assistance.
As with HomeStart, required deposits are much lower than is necessary for banks and building societies, and the LMI is not charged. The deposit required by the Keystart Low deposit home loan is: up to $480,000: 2% deposit; $480,001 – $500,000: 5% deposit; and $500,001 – $650,000: 7% deposit.
Government backed programs that increase the ability of lower income households to borrow to buy their first home have a place in the range of available financial products, however they must be very accurately targeted and effectively administered so as to not increase house prices or allow buyers to borrow more than they can realistically repay. AHURI research into households that defaulted on their mortgage prepayments showed that households with loans having the highest loan-to-value ratio (i.e. they had a lower initial deposit and had borrowed more of their home’s value when taking out their loan) had the shortest time before experiencing difficulty in making payments.