First Home Loan Deposit Scheme amidst a looming recession and growing job instability

Mij Gibson Oct 20, 2020

First-home buyers have been utilising the government scheme introduced in January that allows singles earning up to $125,000 and couples earning up to $200,000 to borrow up to 95 per cent of a property’s purchase price without having to pay lenders mortgage insurance.  And with less than $30,000 saved!

The region-specific property price threshold for Marsden Park NSW under the scheme is $700,000.

The Federal Government’s First Home Loan Deposit Scheme enables 10,000 first-home buyers each financial year to get into the market earlier than planned with a low deposit according to modelling by the National Housing Finance and Investment Corporation.

Australians aged between 18 and 34 made up approximately three-quarters of the guaranteed loans. More than 10 per cent of first-home buyers were over 40.

But those looking to borrow the maximum under the federal government’s First Home Loan Deposit Scheme need to be aware of the looming recession and growing job instability under the current pandemic.

Domain reports that according to International insights manager at Finder Graham Cooke, first-home buyers needed to be very careful if they were borrowing more than 80 per cent of their home value, with one of the first dangers they faced being the increased costs.

“In most cases, you’ll end up paying back something like $1.70 for every $1 you save initially, so what looks like significant savings actually increases your long-term costs.”

“Secondly, taking this option means you are starting your home loan journey with only 5 per cent of equity, a much smaller buffer to the threat of falling house prices and the potential of falling into negative equity.

“With the housing market very much in uncharted waters right now, this is a risk worth considering. However, if you plan to stay in your home in the long term [10-plus years] and you can afford the repayments [under a third of your earnings], then this might very well be an option that lowers the bottom rung of the ladder for some.”

According to Mr Cooke’s explanation a 5% per cent deposit for a first-home buyer in Marsden Park [with a price cap of $700,000 and an average bank variable rate of 4.04 per cent] means they will be paying $76,000 more in the long run!

But principal finance broker at Foster Ramsay Chris Foster-Ramsay says some first-home buyers were comfortable with the risk.

According to Domain, Mr Foster-Ramsay said that a lot, if not all [of first-home buyers], sit in a millennial market and certainly they are textbook in terms of high-risk takers and are generally quite happy to take on the maximum amount of debt, because they believe that what we’re doing is right.

But we suggest that it’s better to be safe than sorry, so if you’re looking to borrow the maximum under the federal government’s First Home Loan Deposit Scheme then we suggest you first seek as much information as possible and talk to experts so that you are fully aware of the total costs and what the looming recession and growing job instability under the current pandemic could mean to you.