Powered by MOMENTUM MEDIA

Pros and cons of the First Home Loan Deposit Scheme

buying
1 minute read

Pros and cons of the First Home Loan Deposit Scheme

by Emma Ryan 03 July 2020 1 minute read

Keen buyers are urged to be cautious before jumping in to the First Home Loan Deposit Scheme.

First Home Loan Deposit Scheme
July 03, 2020

Round two of the federal government’s First Home Loan Deposit Scheme (FHLDS) kicked off 1 July, seeing a further 10,000 places become available to Aussies looking to get into the market with as little as 5 per cent deposit.

However, before entering into the scheme, Rate City has warned buyers to be aware of some hidden costs. 

“Under this initiative, 27 lenders, including big four banks CBA and NAB, are allowing first home buyers to take out a mortgage with as little as 5 per cent deposit, without needing to pay lender’s mortgage insurance,” Rate City said.

“But buying a home with a 5 per cent deposit, as opposed to a 20 per cent deposit, can be more expensive.”

According to the group, 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 mortgage repayment would be $395 extra a month and they would pay $67,067 in extra interest to the bank over 30 years.

“This is based on taking out CBA’s basic home loan at a rate of 3.13 per cent for an owner-occupier paying principal and interest,” it explained. 

Sally Tindall, research director, added: “In these uncertain financial times, where unemployment is on the rise and property prices are on the decline, borrowing with just a 5 per cent deposit can be risky.”

“Falling property prices come with both opportunities and risks. People might find they don’t need to spend as much and their deposit, as a percentage of the property price, has actually gone up.

“However, there’s a risk that property prices will fall even further and people who buy with a wafer-thin deposit could find themselves in negative equity if they’re not careful,” she said.

Potential pros of the scheme, as highlighted by Rate City, are:

  • Avoid lender’s mortgage insurance.
  • Get into your home sooner.
  • Stop paying rent.
  • Prices could rise after you purchase your property.

Potential cons of the scheme, as highlighted by Rate City, are:

  • Higher monthly repayments.
  • Pay extra interest over the life of the loan.
  • Some lenders charge higher interest rates for people with small deposits.
  • Property prices could drop, potentially leaving you in negative equity.
Pros and cons of the First Home Loan Deposit Scheme
First Home Loan Deposit Scheme
spi logo

About the author

Emma Ryan

Emma Ryan

Emma Ryan is the deputy head of content at Momentum Media.

Emma has worked for Momentum Media since 2015, and has since been responsible for breaking some of the biggest stories in corporate Australia, including across the legal, mortgages, real estate and wealth industries. In addition, Emma has launched several additional sub-brands and events, driven by a passion to deliver quality and timely content to audiences through multiple platforms.

Email Emma on: [email protected]Read more

From the web

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.