The 5 per cent deposit scheme has enabled more first homebuyers to enter the property game. Picture: Rohan Kelly
To buy or not to buy? That is an option many first homebuyers with small deposits are grappling with as interest rates and general living expenses rise.
While the government’s 5 per cent deposit scheme enables eligible first homebuyers to save on Lenders Mortgage Insurance (LMI) while getting into the market with a deposit as little as 5 per cent, there are some negatives to the scheme that should be taken into account before signing on the dotted line.
Buyers considering the scheme should weigh up both the pros and cons. Picture: Richard Dobson
CRUNCHING THE NUMBERS
When weighing up the pros and cons of the 5 per cent deposit scheme, formerly called the Home Guarantee Scheme, it’s important to educate yourself on the risks and look at other lending options available, says It’s Simple Finance founder and Sydney-based mortgage broker Joseph Daoud.
MORE: Full list: Suburbs where prices have dropped
Australia’s $85bn savings crisis exposed
“Speaking to a broker and getting clear on the numbers, and allowing a significant buffer for rate rises is essential,” he says.
It’s Simple Finance founder Joseph Daoud. Picture: supplied
While the biggest benefit of the scheme is that it enables buyers to crack the market sooner with a smaller deposit, the strength of this benefit “decreases significantly once interest rates increase and the individual is unable to be flexible with their loans,” he says.
He gives the example of a first homebuyer purchasing a home in Sydney at the maximum price cap of $1.5m with a 5 per cent deposit.
“That means you need a $1.425m loan,” he says.
Daoud says prior to the March cash rate hike, the repayments on a $1.425m loan at 5.34 per cent over 30 years would have been $7,949 per month.
Before you look at properties, consider the rising cost of inflation. Picture: Simon Cross
Following the 25 basis point increase, the repayments would have increased $223 to $8,172.
When added with other rising costs, such as petrol, electricity and groceries, the increase could put first homebuyers in a vulnerable position.
“If your property does not increase in enough value in that time and you can’t remove the government as a guarantor you could be stuck living somewhere you can’t afford, with bills you can’t make due on,” he says.
Helping Hand Finance mortgage broker Andrew Rennie.
INTEREST SAVINGS
While borrowers are taking on more interest over the life of a loan by borrowing up to 95 per cent of the value of a property instead of the traditional 80 per cent favoured by banks, the scheme allows savings in other ways, says Melbourne mortgage broker Andrew Rennie of Helping Hand Finance.
Not only can borrowers save on LMI, which varies depending on the size of the LVR and the property value, but they can also save on interest rate.
“With most lenders, their interest rates are scaled depending on what the LVR is,” Rennie says.
The scheme comes with many benefits. Picture: Canva
Those borrowing with an LVR of 60 or less usually get the sharpest rate, with those borrowing between 60 and 70 paying a bit more, and those borrowing between 70 and 80 paying more still. The trend continues as the LVR increases, with those borrowing 95 paying the highest interest rate. However, first homebuyers making use of the 5 per cent scheme are able to take advantage of the 80 per cent interest rate among participating lenders, he says.
You may not be able to do major renovations on the scheme as you can only keep a limited amount of cash aside when purchasing.
RESTRICTIONS
One restriction to be aware of with the scheme is that you can only keep a certain amount of cash aside when buying your property, says Rennie.
“If you wanted to buy a fixer-upper, for example, and you wanted to have some money set aside to do some renovations, you really can’t do that because you can only carry a small amount of extra money into the scheme,” he says. “Generally, it’s about six months of living expenses.”
The same goes for renting out the property. You would have to exit the scheme before you could turn it into an investment property.
Make sure you think it through carefully before signing on the dotted line. Picture: Tony Gough
And, if you found yourself in a situation where you had to refinance before you owned enough equity to avoid LMI, you could get stung with unwanted costs and wind up in financial difficulty, Rennie says.
While the scheme may be suited to higher income earners who haven’t managed to save a 20 per cent deposit, it may not be ideal for first homebuyers earning a more modest wage, he says.
“Because you have to borrow more money, it means you’ve got to service that,” he says. “That’s where the income side of it can be a little bit of a challenge.”
MORE: Broke 39yo truckie paid off home in 10 years
Home building plunges to 11-year low
‘$90 Bunnings gadget saved me from a $3m mistake’
Help us improve your reading experience
Got a minute? Your feedback will help us build a better experience for you.
Help us improve this page
English (US) · 