The big change first-time buyers were promised at the last Federal election has arrived.
From the start of this month, young buyers can access a home loan with a 5% deposit and avoid punitive mortgage insurance that can cost tens of thousands of dollars.
Currently, Lenders Mortgage Insurance (LMI) is compulsory if a buyer has a deposit less than 20% of their loan’s value.
From October 1, the Government will guarantee 15% of the loan to avoid the insurance impost.
LMI, which provides no benefit to the buyer, can cost between 1%-5% of the home loan value. Westpac Bank calculates a $700,000 loan would incur a $30,797 charge.
Most first-time buyers add it to their home loan rather than pay the one-off, non-refundable fee.
As a consequence, it has a detrimental impact on the calculation of the buyer’s mortgage because LMI is treated as a regular outgoing.
The Government said it would direct Housing Australia to promote the diversity of lenders who will participate in the scheme, giving first homebuyers “greater choice to buy a home through smaller, customer-owned and regional banks”.
It’s a big moment that enhances the affordability of a mortgage at a time when property prices are accelerating as the spring sales season gets into full swing.
How it works
From October 1, the Government will guarantee 15% of a first homebuyer’s loan so they can purchase with a lower deposit and not pay LMI.
The restriction of 35,000 applicants has been dropped, along with the $125,000 income limit. Limits on the value of the loans that qualify under the scheme have been increased.
“In just the first year alone, first homebuyers using the scheme are expected to avoid around $1.5 billion in potential mortgage insurance costs,” a government statement said.
The expanded scheme means a first homebuyer can purchase a $1 million home with a $50,000 deposit. The Government said in this scenario it could take 10 years off the time it might take to save for a deposit that did not incur LMI.
For a $600,000 loan, a deposit of $30,000 will now be needed. The Government claimed this would take six years off the time it took to gather a 20% deposit, or save approximately $25,000 in mortgage insurance.
The median home price in Australia today is $844,000 and 5% of that is $42,200. The last time $42,200 covered the 20% deposit for a median home was in 2002, which shows the scale of how the property market has changed in a generation.
The guarantee is available to purchases worth up to:
$1.5 million in Sydney.
$950,000 in Melbourne.
$1 million in Brisbane and Canberra.
$850,000 in Perth.
$900,000 in Adelaide.
$700,000 in Hobart.