First home buyers could lose out due to higher interest under government scheme

First home buyers could lose out due to higher interest under government scheme

What first home buyers could save by purchasing a new property under the First Home Loan Deposit Scheme (FHLDS) won’t be enough to offset the extra interest costs they could be facing over the life of the loan, new RateCity analysis showed.

Some Sydneysiders may be almost $800 worse off a month in mortgage repayments under the scheme, according to the calculations. 

Sydney first home buyers with 5 per cent deposits could avoid forking out nearly $40,000 in lenders mortgage insurance (LMI) if they buy a home worth $950,000, the scheme’s price cap for the Harbour City.

  • LMI is a cost that’s typically required by lenders if buyers purchase a home with a deposit smaller than 20 per cent of the property value.

First home buyers are also potentially able to enter the Sydney property market with a $47,500 deposit for a $950,000 home – significantly less than the $190,000 needed for a 20 per cent deposit.

However, if a first home buyer purchases a Sydney property with a 5 per cent deposit, the additional interest payments could snowball to more than $140,000 over a 30-year loan term. This equates to $790 extra in repayments per month.

For Melburnians, the extra interest could set them back nearly $127,000 over the life of the loan, or $707 a month, but the LMI they could potentially be saving is about a quarter of that, at some $34,000.

Brisbane first home buyers could face about an extra $97,000 over the 30-year mortgage, compared with the almost $26,000 they’d likely avoid paying in LMI.

The extra interest payments are likely to jump if the cash rate is hiked over the next 30 years.

The calculations are based on CBA’s interest rates of:

  • 3.13 per cent for those with less than 20 per cent deposit; and
  • 2.69 per cent for buyers with a 20 per cent deposit or more.

The analysis accounts for the scheme’s updated property price thresholds but does not factor in the amount of rent payments saved from moving into the purchased home.

Buying with a 5% deposit under the FHLDS vs a 20% deposit

  Deposit size Monthly repayments Interest over 30 years
Property Value 5% deposit 20% deposit Difference 5% deposit 20% deposit Difference 5% deposit 20% deposit Difference
$950,000

$47,500

$190,000

-$142,500

$3,869

$3,079

$790

$490,176

$348,272

$141,904

$850,000

$42,500

$170,000

-$127,500

$3,461

$2,754

$707

$438,578

$311,612

$126,967

$650,000

$32,500

$130,000

-$97,500

$2,647

$2,106

$541

$335,383

$238,291

$97,092

$600,000

$30,000

$120,000

-$90,000

$2,443

$1,944

$499

$309,585

$219,961

$89,624

$550,000

$27,500

$110,000

-$82,500

$2,240

$1,782

$457

$283,786

$201,631

$82,155

$500,000

$25,000

$100,000

-$75,000

$2,036

$1,620

$416

$257,987

$183,301

$74,686

$400,000

$20,000

$80,000

-$60,000

$1,629

$1,296

$333

$206,390

$146,641

$59,749

Source: RateCity.com.au. Notes: Based on CBA’s basic home loan for owner occupiers paying principal and interest with a rate of 3.13% for a loan-to-value ratio (LVR) of more than 80% and a rate of 2.69% for an LVR of 80% or less. Calculations are based over 30 years and do not include fees or stamp duty. Assumes LMI is $0.

LMI costs with a 5% deposit on FHLDS new build thresholds

Location Property Value 5% deposit Loan size LMI cost
Sydney + NSW regional centre $950K $47,500 $902,500 $37,928
Melbourne + VIC regional centre $850K $42,500 $807,500 $33,935
Brisbane + QLD regional centre $650K $32,500 $617,500 $25,950
ACT + NSW other $600K $30,000 $570,000 $23,954
Perth + Adelaide + VIC other + Hobart + NT $550K $27,500 $522,500 $21,958
QLD other $500K $25,000 $475,000 $14,872
SA other + WA other + TAS other $400K $20,000 $380,000 $11,897

Source: RateCity.com.au. Note: LMI costs taken from Genworth calculator

Risks and benefits of buying a property under the First Home Loan Deposit Scheme

Sally Tindall, RateCity’s research director, said buying a property with a 5 per cent deposit can be risky.

“If property prices fall, you could quickly find you owe more to the bank than your house is worth,” she said.

“Not only would that put you in a precarious position if you had to sell, but also it would make it near impossible to refinance until you have a decent amount of equity.”

Similar to first home buyers, refinancing mortgage holders who own less than 20 per cent of their property are generally required to pay LMI.

“The big unknown is whether property prices will rise or fall from when you buy your home. History would suggest property prices, particularly in city centres, are likely to rise over the long term, however in the short term, it’s anyone’s guess what will happen to property prices as the COVID pandemic plays out,” Ms Tindall said.

She added that banks could also charge a higher interest rate to borrowers with small deposits.

“For example, CBA is offering their basic home loan to people with a 20 per cent deposit for just 2.69 per cent. However, anyone with a smaller deposit for the same loan are charged 3.13 per cent. That’s almost half a percent more, at least until you own 20 per cent of your property.”

This is on top of the higher monthly repayments first home buyers would be facing if they purchased under the scheme, compared with someone who bought with a bigger deposit.

Ms Tindall noted that there are also benefits to using the FHLDS, including not having to pay rent while saving up for a larger deposit.

“Jumping into the housing market using this government scheme will get you into your home sooner without having to pay LMI or rent,” she said.

Potential pros:

  • Avoid lenders mortgage insurance.
  • Get into your home sooner.
  • Stop paying rent.
  • Prices could rise after you purchase your property.

Potential cons:

  • Higher monthly repayments.
  • Pay extra interest over the life of the loan.
  • Some lenders charge higher interest rates for people with small deposits.
  • Property prices could drop, potentially leaving you in negative equity.
  • Borrowing more can create more risk – potential rate rises cost you more than if you had a smaller loan, and you’re more susceptible to drops in your income.

Tips for first home buyers thinking of applying for the FHLDS

  • Read the terms and conditions of the scheme carefully, understand how much extra you’ll pay with a smaller deposit and weigh it up against any savings you might make from not paying rent.
  • Don’t bite off more than you can chew because it could end up plaguing you and your finances for years.

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Learn more about home loans

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

Can I apply for an ANZ non-resident home loan? 

You may be eligible to apply for an ANZ non-resident home loan only if you meet the following two conditions:

  1. You hold a Temporary Skill Shortage (TSS) visa or its predecessor, the Temporary Skilled Work (subclass 457) visa.
  2. Your job is included in the Australian government’s Medium and Long Term Strategic Skills List. 

However, non-resident home loan applications may need Foreign Investment Review Board (FIRB) approval in addition to meeting ANZ’s Mortgage Credit Requirements. Also, they may not be eligible for loans that require paying for Lender’s Mortgage Insurance (LMI). As a result, you may not be able to borrow more than 80 per cent of your home’s value. However, you can apply as a co-borrower with your spouse if they are a citizen of either Australia or New Zealand, or are a permanent resident.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Can I get a NAB home loan on casual employment?

While many lenders consider casual employees as high-risk borrowers because of their fluctuating incomes, there are a few specialist lenders, such as NAB, which may provide home loans to individuals employed on a casual basis. A NAB home loan for casual employment is essentially a low doc home loan specifically designed to help casually employed individuals who may be unable to provide standard financial documents. However, since such loans are deemed high risk compared to regular home loans, you could be charged higher rates and receive lower maximum LVRs (Loan to Value Ratio, which is the loan amount you can borrow against the value of the property).

While applying for a home loan as a casual employee, you will likely be asked to demonstrate that you've been working steadily and might need to provide group certificates for the last two years. It is at the lender’s discretion to pick either of the two group certificates and consider that to be your income. If you’ve not had the same job for several years, providing proof of income could be a bit of a challenge for you. In this scenario, some lenders may rely on your year to date (YTD) income, and instead calculate your yearly income from that.

Does Westpac offer loan maternity leave options?

Having a baby or planning for one can bring about a lot of changes in your life, including to the hip pocket. You may need to re-do the budget to make sure you can afford the upcoming expenses, especially if one partner is taking parental leave to look after the little one. 

Some families find it difficult to meet their home loan repayment obligations during this period. Flexible options, such as the Westpac home loan maternity leave offerings, have been put together to help reduce the pressure of repayments during parental leave.

Westpac offers a couple of choices, depending on your circumstances:

  • Parental Leave Mortgage Repayment Reduction: You could get your home loan repayments reduced for up to 12 months for home loans with a term longer than a year. 
  • Mortgage Repayment Pause: You can pause repayments while on maternity leave, provided you’ve made additional repayments earlier.

When applying for a home loan while pregnant, Westpac has said it will recognise paid maternity leave and back-to-work salaries. All you need is a letter from your employer verifying your return-to-work date and the nature of your employment. Your partner’s income, government entitlements, savings and investments will may help your application.

How long does Bankwest take to approve home loans?

Full approval for a home loan usually involves a property valuation, which, Bankwest suggests, can take “a week or two”. As a result, getting your home loan approved may take longer. However, you may get full approval within this time if you applied for and received conditional approval, sometimes called a pre-approval, from Bankwest before finalising the home you want to buy.  

Another way of speeding up approvals can be by completing, signing, and submitting your home loan application digitally. Essentially, you give the bank or your mortgage broker a copy of your home’s sale contract and then complete the rest of the steps online. Bankwest has claimed this cuts the approval time to less than four days, although this may only happen if your income and credit history can be verified easily, or if your home’s valuation doesn’t take time.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Why should I get an ING home loan pre-approval?

When you apply for an ING home loan pre-approval, you might be required to provide proof of employment and income, savings, as well as details on any on-going debts. The lender could also make a credit enquiry against your name. If you’re pre-approved, you will know how much money ING is willing to lend you. 

Please note, however, that a pre-approval is nothing more than an idea of your ability to borrow funds and is not the final approval. You should receive the home loan approval  only after finalising the property and submitting a formal loan application to the lender, ING. Additionally, a pre-approval does not stay valid indefinitely, since your financial circumstances and the home loan market could change overnight.

 

 

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.