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

State Capital city and regional centres Rest 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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Learn more about home loans

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.

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 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.

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.

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 an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

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 do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.