The First Home Loan Deposit Scheme: More than just an election sweetener

20 MAY 2019 By Robert Perks 9 min read Finance

The Coalition’s First Home Loan Deposit Scheme is being viewed as controversial by some, even dangerous by others. From a mortgage broker’s perspective, I don’t think either is necessarily true.

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The promise to help 10,000 first home buyers into the market by topping up their 5 per cent deposits with a government guarantee for 15 per cent of the loan should be viewed as a positive for those trying to enter a tough arena.

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And I don’t believe it will have a marked impact on property prices in general.

Saving a deposit is one of the biggest hurdles for young people, as housing costs for many have become simply unaffordable.

Home ownership is falling fast in Australia: less than half of people aged 25–34 own their home today, and almost half of retirees will be renters in 40 years’ time.

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So, taking the lender’s mortgage insurance (LMI) out of the equation could certainly help these people get a kick-start in the market — it could really be a game-changer.

I believe there are two key takeouts from the promised scheme, with Perth prices used as examples.

1. The saving

  • A 5 per cent deposit home loan with an LMI premium will save up to 5 per cent to prospective first home buyers depending on the lender.
  • Unless the home loan customers pay for it is out of pocket, this insurance premium cost is normally added to the loan, which reduces the impact of the original deposit.
  • The average house price in Perth was $529,500 in March 2019, and a home loan with 5 per cent deposit and LMI premiums would attract an LMI of $16,816 premium cost to the home owner based on Bankwest LMI premium rates.
  • In regional WA, the average sale price was $345,000 in March 2019 and the mortgage insurance premium would cost a home owner $10,956 based on Bankwest LMI premium rates.
  • This is not only a direct saving, it also hasn’t been “added to the loan”, so there is also a saving on interest component of the capitalised premium.

2. The interest cost saving and the total saving

  • A 5 per cent home loan with no LMI versus a home loan with the mortgage insurance premium added to the loan will directly save the home owner in the Perth metro area (based on the above average) $28,069 over the life of the loan and the initial $16,816, equating to a total saving of $44,885.20.
  • In regional WA, this will equate to a real dollar saving of $18,266 over the life of the loan, and when the $10,956 is added to the saving, this equates to a total saving of $29,222 over the life of the loan.

There is even an option to use the First Home Super Saver Scheme to help first home buyers use their super fund as a savings plan and take the 15 per cent tax discount.

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