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Hidden costs of ScoMo’s first home loan deposit scheme

Hidden costs of ScoMo’s first home loan deposit scheme

The Australian Government’s First Home Loan Deposit Scheme has been fully reserved, but for those who missed out, a further 10,000 places will be made available from 1 July.

New figures out today on the scheme show 5,500 guarantees have already been used to purchase properties, with a further 4,500 still in the process of finding their first home. Of those who have subscribed:

  • 59 per cent of applicants are singles earning an average of $67,387;
  • 41 per cent were couples on a combined average income of $109,525;
  • 58 per cent were under the age of 30 years;
  • 11 per cent were over 40 years old.

Source: The National Housing Finance and Investment Corporation.

The Morrison Government initiative launched on 1 January 2020 in partnership with 27 lenders to let first home buyers take out a mortgage with a deposit of as little as 5 per cent. Major banks CBA and NAB were allocated 50 per cent of the guarantees.

But borrowing on a 5 per cent deposit is more costly and in these uncertain times, where families can find themselves unemployed overnight, can be risky.

RateCity.com.au research shows a person buying a $500,000 property with a 5 per cent deposit instead of a 20 per cent deposit would need $75,000 less initially.

But with a larger loan, their monthly repayments would be $395 extra per month and they would pay $67,067 in extra interest to the bank over 30 years.

Note: this is based on taking out the lowest variable rate with CBA for an owner occupier paying principal and interest, taking into account that the borrower with the bigger deposit is eligible for a lower interest rate.

Sally Tindall, research director at RateCity.com.au said would-be first home buyers could use this scheme to take advantage of a slowing property market, but they need to be aware of the risks.

“When the scheme launched at the beginning of the year there was concern it would pour unnecessary fuel on a rising property market. Today the outlook is entirely different. An increase in first home buyer interest might help steady the market as investors get cold feet,” she said.

“While first home buyers taking up the scheme in coming months might benefit from the expected drop in property prices, anyone who bought recently with a small deposit is staring down the barrel of potentially having negative equity in their property.

“People who borrow with a wafer-thin deposit might get onto the property ladder sooner, but they are likely to pay higher monthly repayments and pay tens of thousands in extra interest over the life of the loan, as a result,” she said.

The scheme is available to 10,000 first home buyers each financial year, which is about one tenth of the market according to ABS figures.

Monthly repayments and interest paid on a $500K property

20% deposit

5% deposit

Difference
Deposit size

$100,000

$25,000

$75,000

Loan size

$400,000

$475,000

-$75,000

Monthly repayments

$1,641

$2,036

-$395

Interest over 30 years

$190,922

$257,989

-$67,067

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 2.79% 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.

Potential pros:

  • Avoid lenders mortgage insurance.
  • Get into your home sooner.
  • Stop paying rent.
  • Property 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 leaving you with less, potentially even negative equity.

Eligibility criteria

  • People have to earn less than $125,000 a year for singles, or $200,000 a year for couples. Wages are based on your earnings from the last financial year.
  • Never owned a property.
  • Only for people who intend to live in the home they buy, and pay down their debt.
  • You must be an Australian citizen and over 18. Permanent residents can’t apply.

First home deposit loan scheme – property price caps

StateCapital city and regional centresRest of state
NSW$700,000$450,000
VIC$600,000$375,000
QLD$475,000$400,000
WA$400,000$300,000
SA$400,000$250,000
TAS$400,000$300,000
ACT$500,000
NT$375,000

Source: https://www.nhfic.gov.au. The capital city price caps apply to regional centres with a population over 250K. For other islands and territories not listed see govt website.

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This article was reviewed by Research Director Sally Tindall before it was published as part of RateCity's Fact Check process.

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