With the government’s First Home Loan Deposit Scheme (FHLDS) having gone into effect on 1 January 2020, both brokers and potential borrowers are being called to educate themselves on what the development means for them.
Doubts over the reach of the scheme began as soon as its details started to be announced, with many voicing scepticism an initiative with a small 10,000 borrower limit could have a material impact on the market; now, concern has been raised the scheme is encouraging new buyers to “bite off more than they can chew".
RateCity research shows that while a person buying a $500,000 property with a 5% deposit rather than 20% would need $75,000 less initially, their monthly mortgage repayments would be $329 extra a month. Over the next 30 years, they’d pay the bank $43,546 in extra interest.
“Just because the government is encouraging people to borrow with as little as a 5% deposit doesn’t necessarily make it a great idea,” said Sally Tindall, RateCity research director.
“People that borrow with a wafer-thin deposit might get into the property market faster, but they’re likely to make higher monthly repayments and shell out tens of thousands in extra interest over the life of the loan.”
According to the most recent APRA quarterly property exposure statistics, just 7.35% of new loans settled in the September quarter had an LVR of over 90% -- meaning a less than 10% deposit.
“Over the last five years, APRA has been actively asking the banks to think carefully about approving loans to people with small deposits. Now the government is actively encouraging it,” said Tyndall.
“If you are thinking about signing up to this scheme, go in with your eyes wide open because it’s peppered with potential drawbacks."
On the broker side of the equation, FBAA managing director Peter White has encouraged the association's members to self-educate regarding the “hurdles and limitations” that accompany the initiative.
“It is important to note that the scheme will not be available to everyone and is limited to 10,000 people per financial year, so brokers need to do some research before walking potential borrowers down this path,” White said.
Further, he reminded that only select lenders are participating in the scheme and there are geographical caps limiting the amount available to borrow.
“Brokers should also be aware that the price cap varies according to postcode; for example, in Sydney and Newcastle the maximum amount someone can borrow is $700K, whereas in many regional NSW centres it decreases to $450K,” he added.
Given the many considerations that need to be kept front of mind, the FBAA has worked with the government to assemble an information kit to help brokers navigate the FHLDS. The resource is available on the association’s site, as well as at: https://www.nhfic.gov.au