The First Home Loan Deposit Scheme kicked off in January 2020 and works in a different fashion to many of the other housing affordability policies previously explored by governments. The scheme provides eligible first home buyers with a guarantee that supplements their deposit.
This article outlines how the scheme works.
Housing affordability continues to sit atop the list of hard-to-solve political issues in Australia. In late October 2019, the Government gave the first insight into the mechanics of the First Home Loan Deposit Scheme (FHLDS), its latest attempt to ease the struggle many young Australians face when looking to buy their first home.
The FHLDS kicked off in January 2020 and works in a different fashion to many of the other housing affordability policies previously explored by governments, such as the First Home Saver Accounts and First Home Super Saver scheme. Rather than providing a direct monetary injection or tax saving, the scheme provides eligible first home buyers with a guarantee that supplements their deposit.
The scheme in a nutshell
Under the scheme, the National Housing Finance and Investment Corporation (NHFIC) provides a guarantee to help eligible first home buyers increase their security amount on the purchase of their first home to 20 per cent. First home buyers need to meet an income test, the purchased home needs to be valued below set thresholds and the first home buyer(s) need to have at least 5 per cent of the home’s value as a deposit.
The scheme is limited to providing only 10,000 guarantees per financial year. Guarantees are applied on a first-come, first-served basis.
The NHFIC provides a guarantee that increases the borrower’s security to 20 per cent of the value of the property at purchase. So, if the borrower has a 5 per cent deposit, the guarantee is for a further 15 per cent. If the borrower has 10 per cent, the guarantee is for 10 per cent and so on.
By lifting the borrower’s security amount to 20 per cent, the lender should no longer require the borrower to take out mortgage protection insurance. The cost of such insurance can vary from hundreds to thousands of dollars a year, depending on the age of the life insured, the size of the loan and associated repayments, and the events covered.
For a loan to be eligible for the scheme, it needs to meet the following criteria:
It is provided by an eligible lender;
There are no more than two borrowers;
If there are two borrowers, they are spouses or de facto partners;
Each owner is a first home buyer and will occupy the home;
The loan is to purchase residential property that does not exceed the price cap;
Loan repayments are on a principal and interest basis and the term does not exceed 30 years (although an interest-only period is permissible where the loan relates to the building of a new residence);
If the loan is to buy land, it must also be to build a home on the land; and
The Loan to Valuation Ratio (LVR) is between 80 and 95 per cent.
For an FHLDS guarantee to apply to a loan issued to the maximum of two borrowers, the borrowers must be in a spousal, or de facto, relationship. This is in contrast to the conditions of the First Home Super Saver scheme, where more than two joint purchasers can pool their funds and no specific relationship between the purchasers is required.
If a loan is already approved for the scheme, it can be refinanced, and the scheme will continue to apply to it.
There are limits on how many FHLDS guarantees can be applied to loans issued by the big four banks (Westpac, NAB, ANZ and the Commonwealth Bank). Only two of these banks may have any FHLDS guarantees applied to their loans in a given financial year, and a maximum of 5,000 guarantees may be applied to loans from those two banks.
First home buyer
In order to qualify for the scheme, each owner of the home purchased with the loan must:
Be at least 18 years of age and an Australian citizen; and
Meet the income test.
The income test
The income test is applied to the financial year preceding the year the loan agreement is entered into and assesses taxable income. To qualify for the scheme, such income cannot exceed:
$200,000 combined for couples; or
$125,000 for singles.
FHLDS guarantees can only be applied to loans on properties that do not exceed the price cap for that region.
The price cap for the calendar year is determined by the NHFIC each January 1. The draft mandate applies the price cap at commencement as:
ACT – $500,000;
Sydney, Illawarra, Newcastle and Lake Macquarie – $700,000;
Other NSW – $450,000;
Melbourne and Geelong – $600,000;
Other Vic – $375,000;
Brisbane, Sunshine Coast and Gold Coast – $475,000;
Other Qld – $400,000;
NT – $375,000;
Adelaide – $400,000;
Other SA – $250,000;
Perth – $400,000;
Other WA – $300,000;
Hobart – $400,000;
Other Tas – $300,000;
Jervis Bay and Norfolk Island – $450,000; and
Christmas Island and Cocos (Keeling) Islands – $300,000.
The definition of cities and regional centres listed is taken from the Australian Statistical Geography Standard. Regional centres are defined as those in Statistical Area Level 4. An interactive map provided by the Australian Bureau of Statistics (ABS) is available by clicking here.
Look into the size of capital city areas
It is worth using the ABS’ interactive map to work out where city boundaries lie for the purposes of the value cap.
Somewhat surprisingly, Sydney extends as far north as the top of the Central Coast, where it is very possible to find a three bedroom house for less than the drafted value cap. Similar situations exist in all capital cities. For example, Melbourne extends west beyond Melton, where a four bedroom house can be bought for less than the cap, and it’s a similar situation for Brisbane to Caboolture and so on.
Just because the cap numbers may seem low for inner-city properties, doesn’t mean they are inadequate in the outer suburbs, or even suburbs rarely considered to be in that city.
The value of a property is taken at the time the loan contract is entered into and is the value of the property assessed by the lender. This may be different to the market value at which the property was purchased.
Issues with valuation
It is worth considering what a gap between the lender’s value and the market value of a property will mean. In most cases it is likely that a gap will result because the lender values the property less than the market does (hence a more conservative lending approach).
A lower lender value may help the borrower in situations where they are looking to buy close to the FHLDS value cap for their area. Paying $720,000 for a first home in Sydney won’t necessarily preclude the buyer from the FHLDS if the lender values the property as at the level of the cap or less ($700,000 in 2020). To benefit from this, the buyer will need to have a deposit well above 5 per cent to ensure they can still fit within the lender’s maximum (LVR).
Frances is looking to buy her first home and has been approved for the FHLDS. Her bank allows a maximum LVR of 95 per cent on FHLDS loans.
Frances finds a home she likes in Sydney that has an asking price of $720,000. That said, Frances’ lender values the property at $695,000, so she will not go over the FHLDS value cap for Sydney.
If Frances has saved a deposit of $50,000 (after stamp duty and costs), she might find herself in some trouble. Despite the deposit being over 6 per cent of the property’s purchase price, she will require a loan of $670,000. This represents a Loan ($670,000) to Valuation ($695,000) ratio of over 96 per cent. This breaches Frances’ lender’s maximum LVR and will mean she can’t get finance for the property, even though the property’s price is below the FHLDS value cap.
If, on the other hand, she had a deposit of $100,000 (after stamp duty and costs), Frances would be fine. Her Loan ($620,000) to Valuation ($695,000) ratio would be under 90 per cent. She meets both her lender’s and the FHLDS’ criteria.
The NHFIC’s guarantee under the scheme is limited to 20 per cent of the value of the property, less the deposit paid by the purchaser(s). The guarantee ceases when the outstanding loan amount is less than 80 per cent of the value of the property, as assessed by the lender at the time the loan contract was entered into.
Vague principles for the NHFIC
Included in the FHLDS investment mandate provided to the NHFIC are principles that govern the scheme. These include instructions to the NHFIC to:
maximise the integrity of the FHLDS;
prevent residential properties from being used other than as owner-occupied residences;
encourage and incentivise borrowers to repay loans as soon as possible;
ensure all eligible first home buyers have used the maximum amount of their savings as a deposit;
minimise the quantum of payouts under guarantees issued under the FHLDS, in accordance with industry best practice (including practices applied to loans with parental guarantees);
monitor the status of guaranteed loans to identify when there is a significant likelihood of a borrower defaulting on their obligations under a loan; and
minimise the cost of guaranteed loans to borrowers.
What these principles will mean for the operation of the scheme is not completely clear, however, the Explanatory Statement accompanying the mandate indicates they will help the NHFIC control a number of factors, including redraws and the exploitation of the scheme by non-owner/occupiers.
The scheme will not be a financial product
The FHLDS is exempt from being considered a financial product. As such, the recommendation that a client apply for a FHLDS guarantee is free from the compliance requirements attached to advice on a financial product.
Under the National Consumer Credit Protection Act 2009, the FHLDS does not seem to represent credit either. As the borrower has no obligation to repay the Government for their guarantee, no debt to the Government is incurred or deferred. That said, the loan to which the FHLDS guarantee is applied is most certainly credit, and for a financial planner to provide any specific guidance on the loan to a client, they will need to operate under an Australian Credit Licence.
Knowledge of the FHLDS is important
While the efficacy of the FHLDS remains to be seen, it is important for planners to understand how the scheme works. Providing guidance to clients or their children can be of great value, particularly in family situations where intergenerational wealth transfer is likely.
1. Errol (32) is an Australian citizen looking to purchase his first home. He has never owned property previously and his taxable income for the previous financial year was $80,000. Errol lives in Devonport in Tasmania and plans to buy a home his bank values at $350,000. Will Errol qualify for a First Home Loan Deposit Scheme guarantee on a loan against his desired first home?
b. No, he does not meet the income test.
c. No, he is too old.
d. No, his house is above the value cap.
2. Which of the following is not a condition of eligibility for the FHLDS scheme?
a. There cannot be more than two borrowers on the loan.
b. The borrowers must be direct-line relatives (parents, siblings or spouses).
c. The loan cannot be for a term of greater than 30 years.
d. The Loan to Valuation Ratio must be between 80 and 95 per cent.
3. How is the value of a property determined under the FHLDS?
a. It is the market value of the property at the time the loan contract is entered into.
b. It is the market value of the property at the time of settlement on the property.
c. It is the value of the property assessed by the lender at the time the loan contract is entered into.
d. It is the value of the property assessed by the lender at the time of settlement on the property.
4. In which of the following situations does a guarantee under the FHLDS cease?
a. When the outstanding loan amount is less than 80 per cent of the value of the property at the time the loan contract was entered into.
b. When the property’s value increases above the FHLDS value cap for the relevant region.
c. When the property’s value decreases, causing the LVR of the property to exceed 95 per cent.
d. All of the above.
5. Does a financial planner need to operate under an Australian Credit Licence in order to recommend a client take out a loan supported by a FHLDS guarantee?