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2019 Election Series: Opening doors for first home buyers

Even though a record number of first home buyers entered the property market last year, housing affordability remains a hot topic around the dinner table. Earlier this week and with just a few days before the election, the Liberals announced a new First Home Loan Deposit Scheme designed to put first home buyers on a level playing field with established property investors.

Soon after this policy announcement, the Labor party announced they too would match the proposal; it seems we need to take it seriously as it looks like one way or another this policy, or a variation of it, is likely to be implemented.

Current issues

When looking to purchase a property, it’s ideal to save a minimum of a 20% deposit to avoid Lenders Mortgage Insurance (LMI). This additional cost is insurance that the banks require you to purchase to protect themselves if you can’t meet your loan repayments. It can add thousands of dollars to your overall property cost and add years to your loan.

With a combination of increasing living costs and stubbornly low wage growth, saving a 20% deposit is no easy feat. For example, if you wanted to purchase a $500,000 apartment you would need to save up $100,000 to meet the required 20% (plus purchasing costs).

The First Home Loan Deposit Scheme

Scott Morrison’s proposal is designed to increase loan affordability by eradicating LMI for first home buyers. If you have managed to save a deposit between 5% and 20%, the government will step in and guarantee the shortfall up to 20%, acting as the insurance policy in lieu of LMI. The Liberal government estimates this to be a saving of approximately $10,000 over the life of the loan!

What does this mean for first home buyers?

Aside from the savings made on the LMI, every year it could allow up to 10,000 people to own their own home years earlier than expected. Speaking from experience, it also gives hope that transitioning from a tenant to a homeowner in the not-too-distant future is a much more realistic possibility.

This scheme could also be used in conjunction with the first home buyers grant, stamp duty concessions and the First Home Super Saver Scheme.

Things to consider

If the scheme is implemented in its current form, borrowers still need to be aware of the following issues:

  • The more you borrow the greater your financial obligation, so be certain that you can meet the required repayments.
  • The banks will still be assessing you on the full loan amount, meaning they will want to see proof of income and expenditure. Post Royal Commission, the banks are taking this part of the process very seriously.
  • The scheme is designed to help first home buyers who are low to middle-income earners. You will not be eligible if your gross (pre-tax) income is greater than $125,000 as an individual or $200,000 as a couple. This will be based on the previous year’s income.
  • There will be maximum loan sizes depending on your region to reflect the many different property markets which exist around our country.   

This is our final blog before we enter the polling booths at our local school or community centre on Saturday. We hope that our pre-election series has helped you stay informed and up to date on the different policies proposed by the two major parties that are of a financial nature. We look forward to providing more insights once the election result is known. As always, if you have any questions please feel free to reach out.

 

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.au

Please note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.