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So, as of January 1st 2020, the Government will act as Guarantor. Great, so what does this mean?
It means that from this date, eligible first home buyers will qualify for the “First Home Loan Deposit Scheme” meaning they could potentially enter the market sooner and avoid large Lenders Mortgage Insurance premiums.
I thought the best way to explain this concept is via a case study, so let’s meet Stacey and Joel.
Scenario 1: Stacey and Joel are buying before the “First Home Loan Deposit Scheme” is introduced.
They are buying their first home in Melbourne for $600,000 and, as they are first home buyers, they do not need to pay stamp duty. They have $30,000 in savings, and they will need to contribute all of this towards the purchase and therefore, they take out a loan for $570,000 which is 95% of the property value. As they are borrowing over 80% of the property value, they must also pay Lenders Mortgage Insurance (LMI) on the loan (this is insurance that protects the bank, not you!). LMI premiums vary from lender to lender, and in this case, it would be in excess of $20,000. Some lenders allow you to add this premium to your loan, meaning Stacey and Joel’s loan will end up being $590,000.
Scenario 2: Stacey and Joel are buying after the “First Home Loan Deposit Scheme” is introduced.
This time, Stacey and Joel are taking advantage of the First Home Loan Deposit Scheme. They are still contributing their full $30,000 in savings and borrowing the remaining $570,000. However, under the new legislation, only $480,000 (80% of property value) of the loan will be secured by their property with the remaining $90,000 secured by the guarantee offered by the government. This means their total loan is $570,000 (the same as previous), but they avoid LMI as the bank is not lending over 80% of the security value. Stacey and Joel are now $20,000 better off!
Generally speaking, loans that do not require LMI will often attract more competitive interest rates and do not face the same level of assessment scrutiny as Mortgage Insured loan applications – these are other benefits of accessing a guarantee.
Of course, there are a heap of T&C’s that apply but basically, here are the main ones to determine eligibility;
- For properties up to $600,000 in Melbourne metro areas
- Must be eligible for the first homeowners grant and cannot own an existing investment property
- Singles can be earning up to $125,000 per annum, couples can earn up to $200,000 combined
At Rising Tide, we work with work with a lot of first home buyers and up until this point it was either saving a huge 20% deposit, paying costly LMI, or convincing family to act as guarantors. This new legislation provides another option to help Australians achieve their dream of home ownership and I applaud it!