Would you go in on a property purchase with the Australian government? That’s a question many first homebuyers are pondering as interest rates climb and a 95 per cent lend begins to look less and less attractive.
While the government’s five per cent home deposit scheme has stolen the limelight in recent months, its other first homebuyer scheme, Help to Buy, has gotten much less press despite its potential to help eligible participants “bridge the gap” on out of reach home purchases.
Would you buy a home with the Australian Government? Picture: The Daily Telegraph / Martin Ollman
SHARED EQUITY SCHEME
Help to Buy is a shared equity scheme introduced by the Federal Government (that’s not yet available in Tasmania) that enables eligible first homebuyers to buy a home through a participating lender with a minimum 2 per cent deposit, whereby the Australian government will contribute up to 30 per cent equity for existing homes or up to 40 per cent equity for newly built homes.
The government can contribute up to 30 per cent equity for existing properties. Picture: The Daily Telegraph / Martin Ollman
There are up to 10,000 places on the scheme available each year. At the time of writing, just two participating lenders offer loans through the scheme, Bank Australia and Commonwealth Bank.
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Participants must be at least 18, be an Australian citizen and not own any property in Australia or overseas. Single applicants need to have an annual taxable income at or below $100,000 while couples or single parents applying can’t make over $160,000.
Property price caps apply for each location.
Any property bought through the scheme must remain a principal place of residence until the government’s share of equity is paid back – and paid back it must eventually be.
Homeowners can either slowly chip away to increase their own share of the property, buy back the government’s share through a loan or sell the property. The government’s share will always be based on the value of the property at the time of making the payment. In other words, the government will share in any capital gains (or losses) made over time according to the percentage of equity they hold.
The scheme is aimed at first homebuyers who can’t quite afford to purchase a home on their current income. Picture: Thomas Lisson
RISKS TO CONSIDER
Those considering the scheme should think about what their income might look like in a few year’s time, says Melbourne broker Andrew Rennie from Helping Hand Finance. The government’s official Help To Buy website states that if your income exceeds the threshold for two years in a row, you may need to pay back some or all of the government’s equity share.
“If you need to refinance out of the scheme, what are the requirements?” Rennie says. “If you still don’t have 20 per cent equity in the property, potentially the pitfalls could be that you’ve got to refinance with LMI.”
If interest rates keep going up, one risk is that your borrowing capacity could be reduced, he adds.
Helping Hand Finance mortgage broker Andrew Rennie.
LIMITATIONS OF THE SCHEME
With just two lenders currently writing loans through the scheme, applicants don’t have a huge amount of scope when it comes to how your income is assessed. Not all lenders assess commissions, bonuses and overtime in the same way, he says.
“Having two lenders does mean it can be a bit more restrictive because the policies they have may not be suitable for the type of job you’ve got and the way you’re paid,” he says. However, more lenders could be added to the scheme in future.
The Help to Buy website states the panel of lenders will be “reviewed and updated gradually over the coming months.”
It’s important to consider how you will pay back the government’s share. Picture: iStock
EXIT STRATEGIES
Sydney broker Rebecca Jarrett-Dalton from Two Red Shoes says it’s crucial to think about how you will exit the scheme.
“As your equity grows, so does theirs (the government’s) – and so does the share that you have to pay back to them,” she says. “So, you’re constantly chasing your tail.”
She gives the example of a client she recently helped refinance out of the scheme.
Two Red Shoes mortgage broker and founder Rebecca Jarrett-Dalton.
“As her equity grew, she had to pay more and more back to the government so she ended up borrowing 90 plus per cent of the value of her property in order to exchange and give back the little portion she needed to give back.
“The end goal, if you want to keep your property, is you are going to have to really pay it off as quickly as you can, and then hope that your income stays at the point where you can borrow that extra to repay the government back.”
The scheme could help some families purchase a more suitable property they otherwise wouldn’t be able to afford.
WHO THE SCHEME SUITS
However the scheme does work well for some people, she says. For instance, she has a client who is a single mother with four kids who plans to use the scheme to buy a bigger property than she could have otherwise. Once her kids have left home, she plans to sell and downsize in order to exit the scheme.
Rennie says the scheme is quite valuable for those who don’t earn enough money to buy the type or size of home their family requires.
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