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First Home buyers’ Scheme: who will qualify and is this scheme risky?

14 May 2019 Contributed by: admin

 

Mr Morrison announced over the weekend that his party will allow first home buyers to access 95% loan-to-value ratio mortgage.

This scheme will partner with private lenders, and first home buyers who have saved a deposit of at least 5% can qualify under this scheme.

According to the Liberal Party, the scheme will also partner with smaller lenders in a bid to boost the competition.

This news has been raising many questions around The First Home Loan Deposit Scheme.

We have covered essential things that you need to know about the scheme like who gets it? How effectively will it work?

How did it start?

The Coalition promised to help 10,000 first home buyers by topping up their 5% deposit with 15% of the government guarantee for the loan.

Further, Scott Morrison insisted that the policy should not be considered as “free money”, but experts have risen concerned about the ineffectiveness of this scheme at lifting homeownership rates.

Labor has committed to match it which makes it clear that people would get across the policy regardless of who wins the election.

Who qualifies under the scheme?

A couple earning up to $200,000 or single earning up to $125,000 can qualify if they have saved 5% of the value of the home.

Through the National Housing Finance and Investment Corporation, the government will set $500m of equity to guarantee loans up to a value of 20% of the home.

This means buyers don’t need a 20% deposit and can save approximately $10,000 by not paying lenders the mortgage insurance.

This scheme is limited to 10,000 first home buyers.

This vaguely means one-in-10 of the 110,000 Australian who purchase their first home in the year 2018.

Further, the government has suggested that there will be regional caps on home values for which it will guarantee a deposit.

How long will the guarantee last?

After the first home buyer has borrowed 95% of the house value, the government guarantee will last until the homeowner refinances.

Is this scheme risky for the Government?

Scott Morrison announced that this is not “free money” and lenders will still perform normal checks on the borrowers to ensure they can meet the repayments.

According to Brendan Coates (Grattan Institute housing expert) in case of default, the bank will need to get the money before the Government; otherwise, it can’t be treated as a government-guaranteed deposit. He further suggested that the Government is “opening itself to quite a lot of risk, especially in a falling market”.

Morrison later argued that owners do refinance when there is an increase in equity which will happen under a Liberal-National Government.

Will this scheme work?

As per Coates the policy is “either going to be ineffective or counterproductive”. As it is limited to 10,000 first homebuyers, it will not cause any impact on homeownership rates.

On the contrary, it will bring forward purchases of a group of “pretty small people” who can afford home anyway but don’t do it as they are shy of 20% deposit.

If this guarantee includes people which wouldn’t otherwise be able to afford home then it will impact prices. This way it looks more like a first homebuyer grant which will bid up prices and the vendors will win.

Morrison claimed that the policy will make a huge difference by cutting the time that is invested to save for a deposit by almost half and more.

If the aim is to reduce the time to put together a deposit then the scheme may be a success.

RateCity (Interest Rate Comparison Site) calculated the scheme and came up with the conclusion that it can slash the time taken to save for the deposit by up to 5 years for people living in Sydney, 4 years in Melbourne and 3 years in Brisbane.

The Directors of RateCity, Sally Tindall said a 30-year mortgage with a smaller deposit is a way to pay “thousands more in interest to the bank over the life of the loan”.

How will it impact the removalist and real estate industry?

The real estate has been down for the past couple of months, and this has impacted the moving companies. The introduction of home buying scheme will cut the time invested in saving the deposit which means an increase in homeownership.

Given that there will be an increase in homeownership; the real estate market will come back on track again which will increase the demand for moving companies.

This policy can also cover people in small towns who wouldn’t otherwise be able to afford a home.

Consequently, this will also lead to increase in demand of moving companies. As a result, moving companies have high chances of getting new customers.