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My two cents on the First Home Loan Deposit Scheme

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It's been all over the news lately - a brand new scheme from the Federal Government, which will allow first-time homebuyers to purchase a property with as little as a 5 per cent deposit. 

Better still, they'll be able to get their foot on the property ladder without needing to fork out their hard-earned savings on lenders mortgage insurance (LMI). 

The $500 million scheme was a key election promise. However, now that the details of the program are being revealed, it doesn't seem to be the generous leg-up it was hyped to be. 

And as is often the case: if it seems too good to be true, it probably is. 

Here's my take on the First Home Loan Deposit Scheme

The First Home Loan Deposit Scheme (FHLDS) seems like a good idea - at first glance. 

Unlike shared equity schemes we've seen in the past, like HomesVIc, it provides homebuyers with a guarantee against the remaining 15 per cent of their deposit. 

However, I don't know that the program is going to have the impact that first homebuyers hoped for. 

It will be limited to just 10,000 participants per year, on a first-come, first-served basis. With around 110,000 first homebuyers purchasing properties each year, it's barely a drop in the ocean, with less than 10% of buyers able to benefit from this scheme. 

It means that the yearly allocation is likely to be exhausted in mere months, or perhaps even weeks, so it may not even be an option for those looking to buy a property in the latter half of the year. 

How much can you spend under the scheme?

This is where the real issue with this scheme arises. 

First homebuyers should be aware of the price caps that are set with the FHLDS. 

These caps set a limit on the value of the homes you are able to purchase under the scheme. 

At present, these limits are set at just $700,000 for a home in Sydney and $600,00 for a home in Melbourne. This will do practically nothing to help anyone in Sydney - my clients here would be jumping for joy if they could find a decent first-home for sub $700,000. 

It seems a ridiculous, arbitrary amount to set as a cap. You can certainly forget living anywhere near the CBD.

Do you have your deposit ready to go?

Meanwhile, anyone hoping to score one of these elusive 10,000 spots will need their 5 per cent deposit stashed away and accessible, with all their paperwork and supporting documents ready to go, or they risk missing out. 

Another thing to keep in mind is that buying a property with just a 5 per cent deposit, particularly in those markets that are cooling after a massive boom, could be risky. 

Yes, the government is guaranteeing the remaining 15 per cent of your deposit, so you don't need to pay LMI - this is great. But the fact still remains that you've only contributed 5 per cent to the purchase price. You don't have 20 per cent equity, you have 5 per cent equity. House prices don't need to fall very far for you to end up in negative equity, and on the flip side, they'd have to grow pretty darn fast for you to gain any decent ground. And you're not paying back 80 per cent of the purchase price, you're paying 95 per cent, so your repayments could be huge. 

Have you considered the bigger picture?

Something else I've heard bandied around a lot in relation to this scheme is the concern that if you can't save up more than a 5 per cent deposit, can you even really afford to own a home?

I get it: paying rent while saving is hard work, and you're probably forking out close to what your mortgage repayments will be in between rent and savings right now anyway. But owning a home involved more expenses than just the mortgage. 

You'll have council rates to pay, to the tune of a couple of thousand dollars a year, and water rates, too. There is also building insurance and possibly strata or body corporate fees. Things around the home break, and there's no landlord to call to get them fixed. 

My advice? Keep saving. And if you're really keen to get into the property market, speak to your mortgage broker today about your options. With a solid savings plan and some strategies to get ahead financially, you could be well on your way to home ownership, regardless of whether you're successful with the First Home Loan Deposit Scheme or not. 

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