The government has approved 27 lenders, including National Australia Bank and Commonwealth Bank, to provide guaranteed home loans under the Coalition’s First Home Loan Deposit Scheme (FHLDS).
The program has been widely anticipated since its announcement before the Federal Election earlier this year, as it allows eligible First Home Buyers (FHBs) to purchase a home with a deposit as little as 5 per cent.
27 Lenders approved for new First Home Loan Deposit Scheme
The NHFIC has now approved 27 residential mortgage lenders to offer guaranteed home loans under the First Home Loan Deposit Scheme, starting early next year.
The non-major lenders will have access to no more than 5,000 of the 10,000 available guaranteed loans, yet with the big four taking such a large share of the current home loan pie, it seems the 25 non-major lenders may need to fight it out for the remaining 5,000 guarantees.
The two major lenders will also get a head start in the application process, with approval to offer loans from 1 January 2020. Non-major lenders on the other hand, will not be able to start submitting applications until 1 February 2020.
The 27 approved Australian lenders are:
- National Australia Bank
- Commonwealth Bank of Australia
- Australian Military Bank
- Auswide Bank
- Bank Australia
- Bank First
- Bank of us
- Bendigo Bank
- Beyond Bank Australia
- Community First Credit Union
- Defence Bank
- Gateway Bank
- G&C Mutual Bank
- Indigenous Business Australia
- MyState Bank
- People’s Choice Credit Union
- Police Bank (including the Border Bank and Bank of Heritage Isle)
- P&N Bank
- Queensland Country Credit Union
- Regional Australia Bank
- Sydney Mutual Bank and Endeavour Mutual Bank (divisions of Australian Mutual Bank Ltd)
- Teachers Mutual Bank Limited (including Firefighters Mutual Bank, Health Professionals Bank, Teachers Mutual Bank and UniBank)
- The Mutual Bank
- WAW Credit Union
How does the First Home Loan Deposit Scheme work?
The FHLDS aims to give first time buyers, previously locked out of the housing market by high deposit amounts and costly LMI fees, the opportunity to get their foot on the property ladder.
Starting January 2020, approved lenders will enrol 10,000 FHBs each year into the scheme.
Applicants must be Australian citizens who are at least 18 years of age, and singles must prove they have a taxable income of under $125,000 per year, whilst couples must prove a taxable annual income of up to $200,000.
FHLDS helps first home buyers avoid LMI
In Australia, if you are unable to save a 20 per cent deposit, you typically have to pay Lenders Mortgage Insurance (LMI). This one-off insurance premium protects the lender from the potential loss that could occur if you default on your repayments.
The scheme has been widely anticipated as successful applicants don’t need to come up with a 20 per cent deposit, which means they can avoid paying costly Lenders Mortgage Insurance (LMI).
The FHLDS could end up saving you tens of thousands of dollars in LMI costs, particularly if you were previously considering adding your LMI fee onto your home loan.
How much does LMI really cost?
Adding LMI onto your home loan can increase your total debt by tens of thousands of dollars, yet it’s common practice in Australia, as if you don’t have the 20 per cent deposit for a home loan, it’s unlikely you have thousands of dollars in cash lying around to pay your LMI upfront.
The FHLDS could benefit many Australians trying to buy their first home, as they would not only avoid the LMI fee, but also the potential costly interest that comes with it.
Consider the following: you are unable to save the $18,000 LMI fee, so choose to add this onto your home loan. Your home loan is for a loan term of 30 years, with an interest rate of 4.5 per cent. As LMI incurs the same interest as your principal amount if added onto your loan, it would add an extra $14,833 in interest to your home loan debt over your 30-year loan term.
That’s almost as much as the LMI fee itself, and means the total cost of your LMI plus interest is $32,833.
How much will you have to save for a 5% deposit?
The First Home Loan Deposit Scheme has outlined certain property price thresholds for each state, and capital city.
Taking Sydney as an example, a $700,000 home would usually require the standard 20 per cent deposit of $140,000. However, if you were a successful applicant of the FHLDS you would only need a 5 per cent deposit of $35,000.
A 5 per cent deposit for a $700,000 home is substantially more affordable than a 20 per cent deposit, but can the statistically ‘average’ Australian afford it?
Can Australians realistically afford a 5% deposit?
Avoiding the need to save an extra $105,000 to get your foot on the property ladder and start building equity is nothing to be sneezed at. However, when looking at ABS data, it seems a 5 per cent deposit may still be unaffordable for the average Australian.
ABS data shows Australians earn an average of $88,492 per year.
If we take the average Australian earnings as the standard income, you would need to save 39% of your income to achieve a 5 per cent deposit in just one year. This also does not consider the fees associated with buying a home, including legal fees, establishment fees and stamp duty fees, that can cost you thousands of dollars.
Whilst it seems that the FHLDS is on track to provide FHBs with the boost they need to secure the home of their dreams, the potential inability to save a 5 per cent deposit, coupled with the fact that only 10,000 guarantees are on offer each year, would this be enough to cover the demand across the country?