Government’s Pledge to Help First Home Buyers
There’s been a lot said with regards to the Governments pledge to help First Home Buyers by promising they would only need a 5% deposit to get into their first home.
There’s been a lot said, but very little details on how it will actually work.
While exact details surrounding how the government policy will work are yet to be released, we can speculate that the government guarantee will essentially remove the need for LMI, or possibly pay the premium for the home buyer.
All of this depends on the banks agreeing to the government terms and personally I can’t see them eliminating LMI based on the governments word.
To understand this a little more, we need to take a step back.
At a maximum, some banks will lend a maximum of 95% of the value of a property. However, if you need to borrow any more than 80%, the lender will have you pay a Lenders Mortgage Insurance (LMI) policy. This doesn’t cover you or your house. It’s an insurance policy that ensures that if you fail to repay the loan, any loss the lender may incur is covered.
Depending on the value of the home, the LMI policy can cost thousands of dollars. With this in mind, your 5% deposit that you’ve managed to save simply isn’t enough.
This is where the 20% deposit figure comes into play. If you have 20%, you avoid the need to spend money on an LMI policy.
What we do know;
- The government has pledged to guarantee the additional amount needed in order to reach the 20% threshold to avoid needing to pay Lenders Mortgage Insurance (LMI).
- This would see first home buyers needing only 5% deposit with the bank then contributing the remaining amount under a mortgage agreement.
Who is eligible?
- Again, exact details are still unknown, but we do know that to be eligible you must be a First Home Buyer who earns up to $125,000 as a single and $200,000 as a couple.
When will it be released?
- The government has advised they wish to have the scheme up and running by January 2020.
Are there any risks?
- Your first home is a big investment and as with any sort of investment, there are risks.
Being able to purchase your first home with a smaller deposit means you have a smaller margin for error if things go wrong. If, after the purchase, you find yourself in a position where you can no longer make your repayments or need to sell for reasons unforeseen, by the time you take into account the fees involved with selling your home, you will be left back at square one with no deposit for your next purchase or in extreme cases, a residual debt.
But risk is a two-sided coin, and the flip side is reward.
Reward comes from being able to get into your own home sooner rather than later. Being able to begin paying down that debt and building equity in your property, ensuring you can set yourself and your family up for a stable tomorrow.