Percentage game
Money Magazine Australia|August 2020
Percentage game
Would-be first home buyers need not despair if they are struggling to raise a 20% deposit
DARREN SNYDER

The first home loan deposit scheme is an exciting boost for first home buyers, allowing them to buy a property with a 5% deposit and without lenders mortgage insurance (LMI).

Instead of LMI, the federal government will guarantee 15% of the home loan. In other words, the government is taking on the lender’s risk that you don’t pay off the loan.

According to Deslie Taylor, mortgage broker and principal at Mortgage Choice Ormeau, the scheme is saving first home buyers up to $15,000 off their upfront costs. It means these same buyers don’t have to immediately come up with thousands of dollars for LMI after already saving for a deposit.

Let’s say you had a 5% deposit on a $475,000 home, totaling $23,750. Add the cost to buy (solicitor fees, building and pest inspection costs and other charges) and you could easily spend another $5000. Then if you paid your LMI as a lump sum of $15,000, you would be looking at $43,750 upfront and almost double your original deposit.

Arguably if you can afford that final figure (with some wriggle room) you could form a stronger deposit on the same or another home and lessen the LMI; and similarly, if you bargain down the price of your property it can reduce the LMI. But it’s not really the point of the government’s offer, and Taylor says that in the $475,000 example – if you qualified for the scheme – you’d only have to come up with $28,750 upfront for the deposit and buying costs.

You can learn more about how the first home loan deposit scheme (FHLDS) works and how to apply at the National Housing Finance and Investment Corporation (NHFIC) website.

Don’t qualify? Don’t fear

If you’re not lucky enough to qualify for the FHLDS or you’re not going to be one of the successful applicants (only 10,000 positions were on offer from July 1), don’t fear – all is not lost. There are several other home-buying grants you can apply for and they differ from state to state (see July issue, page 69).

James Symond, chief executive at Aussie home loans, says if your deposit is less than 20% of the home’s value, some lenders will allow you to add LMI to the loan, otherwise known as capitalising LMI. Here you gradually pay the insurance cost along with the rest of the loan.

The downside, says Symond, is that this will add to the long-term cost of LMI because you’re paying interest on the premium. But this can be minimised by making extra repayments.

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August 2020