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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 sizeMonthly repaymentsInterest over 30 years
Property Value5% deposit20% depositDifference5% deposit20% depositDifference5% deposit20% depositDifference






































































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

LocationProperty Value5% depositLoan sizeLMI 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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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.



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