The First Home Loan Deposit Scheme: More than just an election sweetener
The Coalition’s First Home Loan Deposit Scheme is being viewed as controversial by some, even dangerous by others. From a mortgage broker’s perspective, I don’t think either is necessarily true.
The promise to help 10,000 first home buyers into the market by topping up their 5 per cent deposits with a government guarantee for 15 per cent of the loan should be viewed as a positive for those trying to enter a tough arena.
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And I don’t believe it will have a marked impact on property prices in general.
Saving a deposit is one of the biggest hurdles for young people, as housing costs for many have become simply unaffordable.
Home ownership is falling fast in Australia: less than half of people aged 25–34 own their home today, and almost half of retirees will be renters in 40 years’ time.
So, taking the lender’s mortgage insurance (LMI) out of the equation could certainly help these people get a kick-start in the market — it could really be a game-changer.
I believe there are two key takeouts from the promised scheme, with Perth prices used as examples.
1. The saving
- A 5 per cent deposit home loan with an LMI premium will save up to 5 per cent to prospective first home buyers depending on the lender.
- Unless the home loan customers pay for it is out of pocket, this insurance premium cost is normally added to the loan, which reduces the impact of the original deposit.
- The average house price in Perth was $529,500 in March 2019, and a home loan with 5 per cent deposit and LMI premiums would attract an LMI of $16,816 premium cost to the home owner based on Bankwest LMI premium rates.
- In regional WA, the average sale price was $345,000 in March 2019 and the mortgage insurance premium would cost a home owner $10,956 based on Bankwest LMI premium rates.
- This is not only a direct saving, it also hasn’t been “added to the loan”, so there is also a saving on interest component of the capitalised premium.
2. The interest cost saving and the total saving
- A 5 per cent home loan with no LMI versus a home loan with the mortgage insurance premium added to the loan will directly save the home owner in the Perth metro area (based on the above average) $28,069 over the life of the loan and the initial $16,816, equating to a total saving of $44,885.20.
- In regional WA, this will equate to a real dollar saving of $18,266 over the life of the loan, and when the $10,956 is added to the saving, this equates to a total saving of $29,222 over the life of the loan.
There is even an option to use the First Home Super Saver Scheme to help first home buyers use their super fund as a savings plan and take the 15 per cent tax discount.
