The Australian First Home Loan Deposit Scheme (FHLDS) is a federal initiative to “support eligible first home buyers purchase a home faster” which is great in theory, but let’s be real – it isn’t a perfect solution for everyone looking for their first home.

Should you even apply for the First Home Loan Deposit Scheme?

The Federal government scheme, which launched on 1st January 2020, aims to help thousands of first-home buyers get a foot on the property ladder sooner, and potentially buy before they get priced out of the market. Initially, the FHLDS might seem like a financial lifesaver for first-time buyers who are just trying to save a home deposit, but the handout is not without limitations. Before you jump in and apply it’s important to understand what potential long term impact the scheme could make to your individual circumstances, and whether it’s the best option for you.

Understand what’s on offer

At launch the FHLDA offered 10,000 first home buyers the opportunity to buy their first home with a deposit as low as 5 per cent of the purchase price, without paying Lenders Mortgage Insurance (LMI). 5,000 of these places were allocated to major banks – CBA and NAB – and the other 5000 were distributed across 25 non-major lenders.

An additional 10,000 FHLDS (New Homes) places will be available from 1 July 2021 to 30 June 2022.

Before this deal was on the table, anyone getting into their first mortgage was expected to provide a deposit equal to 20 per cent of the purchase price, or take out costly LMI to cover the difference.

For example, when buying a property worth $400,000, a 20 per cent deposit would be $80,000. Without the government scheme, if a first-home buyer could only provide a 5 per cent deposit of $20,000, their LMI cost for the remaining 15 per cent would be $12,768 – that’s $32,768 up front even before considering the additional costs of buying property. Under the scheme, the government will cover the LMI, so the first-time buyer would only need $20,000 to get into a home loan.

The FHLDS means eligible first home buyers can get into the market without being penalised for having a smaller deposit.

It’s important to note that while the smaller deposit might get you into your home sooner, the other associated costs of buying property (such as moving expenses, building and pest inspections, transfer or stamp duties, personal insurances and legal fees) remain the same, and still need to be factored into your savings.

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The initiative could save eligible buyers tens of thousands of dollars on day one of their home loan journey, but is it worth it in the long term?

Is a 5% deposit in your best interest?

A 5 per cent deposit sounds a lot better than a 20 per cent deposit, but let’s look at it another way: Instead of borrowing 80 per cent of your home loan, the FHLDA scheme means you’ll be borrowing 95 per cent.

Yes, this will get you into a property sooner. You’ll save time by not having to come up with a larger deposit (or find the funds for LMI) and potentially benefit from buying before the market shifts but you’ll have a larger loan sum. As a result, you will pay more in interest over the life of the loan.

Financial comparison site Canstar crunched the numbers and calculated that someone buying a $400,000 home with a 5 per cent deposit would likely pay over $62,000 more in interest over the loan term, than if they had a 20 per cent deposit. Is it worth it? Maybe. For someone buying in a rising property market (who needs longer to save up 20 per cent), that $62,000 could be a small price to pay to get on the ladder ASAP and reap the rewards of long term capital growth. Just make sure you consider this in your calculations.

Read the fine print

This scheme is not a financial free-for-all. The government has put limitations on the salaries of potential buyers. To be eligible, an individual buyer must earn less than $125,000 a year before tax and a couple buying together for the first time can’t earn more than $200,000 a year before tax.

Eliza Owen, head of research for property data company CoreLogic, says these salary parameters are too high, highlighting that a $125,000 yearly wage is in the top 20 per cent of full-time workers – much higher than the Australian median of $78,000. Her point is that the scheme may actually provide more of an advantage to those earning towards the top of the threshold as they can save a 5 per cent deposit much faster.

Buy for the property suitability, not the First Home Deposit Scheme limit

Anyone with even a basic knowledge of the Australian property market will know that real estate values in various cities and regions vary dramatically. Because of this huge divide, the government has placed thresholds on the purchase price of homes to be bought under the FHLDA scheme.

These price caps range from $250,000 in regional South Australia to $700,000 for metropolitan Sydney. Check the threshold in each city or region here.

While these limits were set to reflect average entry-level prices it pays to remember that the property market is fluid, and you’re buying a home that you actually have to live in, so don’t get tunnel vision on the numbers. The right property for you could be outside the threshold in your area.

Watch out for unrealistic entry-level house pricing

Critics of the FHLDA scheme believe that given the initiative will only be available to 20,000 buyers (half early and half later in the year) a rush on homes in certain price brackets could create an artificial bubble that will ultimately push prices up. Economists estimate there are 110,000 first-home buyers each year, so the scheme in its current format will actually help less than 10 per cent of the market.

Unfortunately first-home buyers are often up against pretty stiff competition not just from other first-time buyers, but cashed up investors too. Both parties are looking for good-value properties that are considered the “entry price” in areas near employment hubs and transport.

Do your homework by understanding property pricing, and study comparable sales over the past 12 months to have a clear knowledge of trends in the areas you’re looking in. While the COVID-19 pandemic has caused some disruption in the property market there are still plenty of first home buyers in stable employment who are looking out for suitable properties, and potentially less suitable properties on the market. It can be tempting to rush in but don’t get fooled by FOMO – you’re making an investment for the long term, so it pays to throughly assess any property before making an offer.

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