First home buyers rush Low Deposit Scheme, but plenty more spots coming

First home buyers rush Low Deposit Scheme, but plenty more spots coming
Jonathan ChancellorDecember 7, 2020

There's been a rush of applicants from first home buyers seeking to secure a spot to buy with a deposit of as little as 5 percent under the new Federal Government home loan deposit guarantee scheme.

That's not surprising, but there are plenty of spots still available.

Especially as 5000 spots became available on February 1 with the 25 non-bank and regional lenders including the Bendigo Bank, Australian Military Bank and Community First Credit Union. 

The number of applicants across Australia is capped at 10,000 every financial year, but as the initiative began on January 1, there will be the double opportunity during 2020, ie from July 1.

It has been reported that most of the opening 3000 spots have been taken, but many of these are really pencilled in reservations that won't ever see an actual purchase.

Those intending buyers already on the list with lenders will next need to get through the still onerous bank approval process.

And then they will need to find a suitably-price property within the ensuing 90 days.

That might just be difficult as it appears fresh 2020 listings are only slowing coming to market.

Even with 20,000 participants in 2020, it was always likely to be a squeeze as some 80,000 other FHBs will still need to find their own borrowing arrangements.

Sydney FHBs will need to find properties costing less than $700,000 under the scheme.

The same price cap will also apply to NSW regional centres with a population of 250,000 plus, namely Newcastle, Lake Macquarie and the Illawarra around Wollongong.

The scheme to be known officially as the First Home Loan Deposit Scheme (FHLDS) will available only to FHBs with an annual income of up to $125,000 or couples with a combined $200,000 per year who haven't saved the standard 20 percent deposit.

Prime Minister Scott Morrison and Treasurer John Frydenberg announced the scheme just days before the May 2019 election, when the property market was in a downturn.

The Prime Minister expressed concern the time it took to save a home deposit was one of the barriers to home ownership.

There is the real risk that competitive tension will see prices rise as FHBs expeditiously seek out their first step on the property ladder.

The National Housing Finance and Investment Corporation (NHFIC) is overseeing the scheme in a vastly different property market, at least in Sydney and Melbourne.

It needs to wise to market shifts and to smartly recommend adjustments so that its policy objectives are met. recently calculated a person buying a $500,000 property with a 5 per cent deposit instead of a 20 per cent deposit would need $75,000 less initially, but with a larger loan, their monthly mortgage repayments would be $329 extra a month and they would pay $43,000 in extra interest over 30 years, based on the rate of 3.32 per cent.

Corelogic researcher Eliza Owen noted paying more interest on a low deposit loan makes more sense "if property values are going up.

"By accessing a property sooner, the asset has longer to accumulate capital growth that may outweigh the higher level of interest paid." 

Sally Tindall, research director at RateCity, says buyers need to "go in with eyes wide open because it’s peppered with potential drawbacks."

Meanwhile ME Bank’s latest sentiment report, conducted last month, shows FHBs’ hopes haven’t been crushed by rising prices, with more than half planning to buy this year, compared to the 38 percent who were hopeful in late 2019.

This article first appeared in The Daily Telegraph.

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

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