Government’s first home buyers were able to buy four years quicker: report

Government’s first home buyers were able to buy four years quicker: report

A $400 million government scheme helped one-in-eight people buy their first property four years quicker, a report has found, leading to calls from an industry association for its expansion.

The federal government’s National Housing Finance and Investment Corporation has released the initial report evaluating the first home loan deposit scheme over a six month period ending 30 June.

The scheme is designed to help 10,000 people buy their first property with a mortgage deposit as little as 5 per cent without needing them to save for lenders mortgage insurance, a bank tax typically in the thousands levied on applicants who have a deposit less than 20 per cent. 

Under the scheme, the government guarantees the remaining deposit shortfall.

“The scheme had an outstanding first year and has delivered on (the federal government’s) promise to help get Australians into their first home sooner,” assistant treasurer Michael Sukkar said.

“(It) has helped get Australians into a home of their own … years earlier than they had planned.”

Who took up the scheme?

Most people can afford the servicing of a mortgage, the report said, but only after they cleared the hurdle of saving a deposit. 

The people who took the government up on the first home loan deposit scheme tended to be millennials aged from 25 to 29, the report found, although about 10 per cent were over 40 years old.

Half of all guarantees were issued to people who were single; they earned from $60,000 to $80,000. Couples had a combined income of $90,000 to $125,000.

Where and what did they buy?

Most of the properties purchased were based in a major city -- 62 per cent. The remaining were located in regional areas.

“Demand was … strong across south western Sydney (Campbelltown area) and the outer suburbs of Melbourne (Craigieburn and Frankston),” the report said. 

However, applications were highest in the Toowoomba area of regional Queensland, where 70 loans were granted.

Most people bought a house -- about 70 per cent of applicants -- at a median price of $385,000.

About 25 per cent purchased apartments -- mostly in capital cities -- at a median price of $475,000

The remaining 5 per cent purchased townhouses.

Clearing a four year hurdle. In some cases, even longer.

The government’s role in guaranteeing part of a 20 per cent home deposit -- negating the need for applicants to save possibly thousands for loan mortgage insurance -- helped fast track applicants by four years on average, the report found.

The scheme helped shave five years off first home buyers looking for a property in New South Wales.

Out of the 10,000 applicants, 1804 were classified as ‘key workers’: teachers, nurses, defence force personnel, firefighters, police and childcare workers.

Another 10,000 people are able to apply for the first home loan deposit scheme, as of 1 July 2020.

Make it available to more people: HIA

The Housing Industry Association is campaigning the federal government to make the home loan deposit scheme available to more than 10,000 applicants at a time, claiming it overcomes key challenges in housing affordability. 

“The time it takes to save a deposit is always a challenge for first home buyers, but … combining this with tougher lending restrictions had meant first home buyers were waiting years to achieve their home ownership dream,” a spokesperson said.
Making it available to more applicants would also help the construction industry, they said.

“Increasing the number of applicants … would not only help to boost the economy, but will clearly help lower and middle income workers move into a home of their own much sooner,” the spokesperson said. 

“The report shows just 10 per cent of buyers accessed the scheme to buy a new home.”

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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.

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.

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.

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.

How much can I borrow with a guaranteed home loan?

Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

How do I save for a mortgage when renting?

Saving for a deposit to secure a mortgage when renting is challenging but it can be done with time and patience. If you’re on a single income it can be even more difficult but this shouldn’t discourage you from buying your own home.

To save for a deposit, plan out a monthly budget and put it in a prominent position so it acts as a daily reminder of your ultimate goal. In your budget, set aside an amount of money each week to go into a savings account so you can start building up the ‘0’s’ in your account.  There are a range of online savings accounts that offer reasonable interest, although some will only off you high rates for the first few months so be wary of this.

If you aren’t able to save a large deposit, you can consider ways of entering the market that require small or no deposits. This can include getting a parent to act as guarantor for your home loan or entering the market with an interest only loan.

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.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.