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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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.

Can I get a NAB first home loan?

The First Home Loan Deposit Scheme of NAB helps first home buyers purchase a property sooner by reducing the upfront costs required. This scheme is offered based on a Government-backed initiative, with10,000 available places announced in October 2020.

Suppose your application for the NAB first home buyer loan is successful. In that case, you’ll only need to pay a low deposit, between 5 and 20 per cent of the property value and won’t be asked to pay lender's mortgage insurance (LMI). You’ll also receive a limited guarantee from the Australian government to purchase the property.

If you’re applying for the NAB first home buyer home loan as an individual, you need to have earned less than $125,000 in the last financial year. Couples applying for the NAB first home loan need to have earned less than $200,000 to be eligible. To be considered a couple, you need to be married or in a de facto relationship. A parent and child, siblings or friends are not considered a couple when applying for a NAB first home loan.

The NAB First Home Loan Deposit Scheme is currently offered only to purchase a brand new property, rather than an established property.

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.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

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.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase.