If you’re looking to buy your first home then no doubt you’ve heard about the First Home Loan Deposit Scheme (FHLDS) by now.
But for those who haven’t, it essentially allows first-home buyers the opportunity to get into the market with as little as a 5 per cent deposit, without the need to pay expensive lenders mortgage insurance (LMI).
The program has been incredibly popular ever since it was introduced at the start of this year, with many having to be quick to snap up one of its limited places.
But, just because you can take advantage of the FHLDS does that mean you should?
Is a 5 per cent deposit enough?
Obviously one of the big drawbacks in purchasing a home with a small deposit is that you would need to pay LMI on top, which can add thousands of dollars onto your purchase price.
The FHLDS does eliminate a big cost for those eager to get into the property market as quickly as possible, however it’s important to realise that taking out a home loan with a lower deposit does leave you paying interest on a larger amount, so you will still end up paying more than if your deposit was bigger.
You could end up stuck with a particular loan
While lenders that support the FHLDS have promised not to charge its borrowers a higher interest rate than similar borrowers, it’s worth keeping in mind that a lower-deposit home loan is still likely to attract a higher interest rate than a loan entered into with a larger deposit.
Once you have a loan you are also going to find it difficult to refinance or switch lenders, as you won’t have a lot of equity in your home.
Normally to refinance you will need at least 20 per cent equity in a home to avoid paying LMI.
Your property options will be limited
Another big consideration before stepping onto the FHLDS bandwagon is whether or not it’s compatible with the type of property you intend to purchase.
The new round of places released in the latest Federal Budget are limited to those building or purchasing new homes, which eliminates a lot of properties straight off the bat.
The scheme also has price caps and other conditions that may limit property options for those looking to buy through the scheme.
There are undoubtedly some drawbacks of the First Home Loan Deposit Scheme, however it has a lot of positives too.
Saving up for the 20 per cent deposit needed to get a traditional home loan without LMI is no easy feat, and can take a number years for even the most diligent of savers to achieve.
Because of this a lot of first-home buyers have been quite happy to enter the market with a lower deposit (even if they were up for LMI) if it meant they could get a property sooner, particularly in markets where capital gains have been climbing faster than people’s savings.
But now first-home owners may not feel the extra pressure to save up for the full 20 per cent deposit, and can get into the market sooner without having to worry about the extra costs associated with LMI.
The scheme isn’t suitable for everyone, but it is a great bonus for those whose property goals it aligns with.
To find out more about the scheme and whether or not you might be eligible visit www.nhfic.gov.au/what-we-do/fhlds/.