PROPERTY

Seven products to help first-home buyers onto the property ladder

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Interest rates may be at their lowest since the 1950s, but high property prices make climbing onto the first rung of the property ladder no easy feat. The good news is that help is at hand.

The home loan industry, with state and federal governments, is pitching in with new products to give first home buyers a leg-up.

Meeting the deposit challenge

One of the biggest hurdles is saving a decent deposit. Low-deposit loans are available with a maximum loan-to-value-ratio (LVR) - the amount you can borrow as a percentage of the property's purchase price - of 95%. So it's possible to buy a home with just a 5% deposit, though there are strings attached.

first home buyer assistance

"Cracking into the housing market with a low deposit may seem tempting, and can absolutely be the key to getting your foot in the door sooner - but beware," says James Symond, chief executive of Aussie home loans.

"If first home buyers have a high LVR they are likely to have higher mortgage repayments, plus also have to fork out for lenders mortgage insurance[LMI], which protects the lender and is an added cost to consider."

LMI can be a major hurdle. It applies when you have less than a 20% deposit (meaning an LVR over 80%). The rub is that it doesn't come cheap. If you buy a $500,000 home with a 10% deposit the LMI would cost around $8640. On a 5% deposit it rises to about $15,960.

Some lenders will let you add the LMI premium to the loan balance (known as capitalising LMI), so that it's paid off gradually as part of the regular repayments. The catch is that this can push the amount you're borrowing over the lender's maximum LVR, potentially leaving you back at square one.

"Crunch the numbers," advises Symond. "Is the cost of LMI worth getting into the market now, or are you better off waiting until you have a bigger deposit?"

According to the latest First Home Buyer Sentiment Report by mortgage insurer Genworth, six out of 10 first home buyers believe it's worth buying now with a smaller deposit. Fortunately, there is a growing number of ways to get into the market without being slugged by a lump sum LMI premium.

Monthly option for LMI

Recognising the need to bridge the deposit gap, Genworth has introduced a new pay-by-the-month LMI product as an alternative to paying the cost upfront.

"This provides borrowers with the option of not capitalising the premium into their loan, as many do today with the single upfront premium product, or paying the entire LMI premium in one lump sum payment," says Georgette Nicholas, Genworth's CEO and managing director.

"Instead, first home buyers can pay the LMI premium in instalments over time, which means a greater portion of their loan can be utilised to support the purchase of their first home."

The pay-by-the-month option can prevent first home buyers overshooting a lender's maximum LVR while also saving on higher long-term interest charges, which can be the case when LMI is added to the loan.

Deposit gap loan for SA

In South Australia, first home buyers will soon be able to access a new state government initiative that helps to beef up their deposit and potentially avoid LMI altogether.

From December 2019, a deposit gap loan of up to $10,000 will be available to first home buyers there. The loan is interest free and paid off over five years. Income limits apply to be eligible - a maximum combined after-tax income of $60,000 for couples or $52,000 for singles.

First home loan deposit scheme

The federal government's new first home loan Deposit scheme (FHLDS), which kicks off on January 1, 2020, is pitched at first home buyers with a small deposit. If you can save a 5% deposit, the government will guarantee the remaining 15%, meaning no LMI is payable.

Not surprisingly, the FHLDS is shaping up to be popular. Genworth's research shows that a whopping 75% of first home buyers plan to rely on the scheme to get into the market. But it's only available to 10,000 first home buyers each year. These spots are bound to be hotly contested, making it sensible to consider alternative strategies.

Shared equity options

Among those who've recently purchased their first home, less than one-third (31.3%) saved 100% of their deposit. Across these buyers, the majority (56.9%) relied on family assistance - either gifts of cash (28%), a loan (21%), or a guarantee from a relative (16%).

For families who have the spare cash to support a first home buyer, it can be worth looking at a shared equity agreement. Bank First recently introduced its First Start shared equity agreement (SEA).

This lets family members who contribute money towards a deposit have a stake in the future equity of a first home owner's property. And, as the financial contribution reduces the amount the home buyer has to borrow, it can mean getting around LMI.

"While many parents are keen to help get their children into their own home, there is a risk of legal disputes and family breakdowns when informal family loans and contributions go wrong," says Bank First CEO William Wolke. "The First Start SEA provides parents and children with peace of mind."

No regular principal and interest repayments are required with the First Start SEA. Instead, the home buyer repays the family contribution and a portion of home equity either when the place is sold or at the end of the loan term. Unlike co-buying with family members, the First Start SEA sees the first home buyer retain full ownership of the property and still be eligible to claim the first home owner grant and any stamp duty concessions.

Family pledge loans

There is also a way for family members to help without dipping into their own pocket.

Parents who are home owners can act as a guarantor for their adult child's loan by offering part of their equity in their own home as security. No cash changes hands, and the combined value of a cash deposit plus a guarantee can push the loan security up to the 20% mark, letting first home buyers bypass LMI.

The downside of this strategy is that the guarantor can be lumbered with responsibility for the entire loan if their child can't keep up the repayments.

Here, too, lenders are coming up with innovative options, such as Heritage Bank's family guarantee loan.

"It works by splitting the total amount across two loans - one secured by the property being purchased, and a second smaller loan partially secured by an immediate family member's property as guarantor," says Peter Lock, CEO of Heritage Bank.

Lock says the loan "helps limit the amount the family member is guarantor for. This reduces the risk and provides the guarantor with greater peace of mind about their own situation."

According to Lock, the way the loan is structured makes it "a fantastic way for parents to help their kids buy their own home without over-exposing themselves". And by pushing the loan security up to the all-important 20% mark, the first home buyer can avoid LMI, helping to make home ownership more affordable.

Heritage Bank's family guarantee is available across the bank's owner-occupier variable and fixed-rate products, including its discount variable home loan with a rate of 3.22%.

A number of other lenders offer loans tailored around a family guarantee, including Greater Bank, whose Family Pledge loan lets first home buyers borrow up to 110% of the property value.

Low deposit/no LMI loans

With plenty of strategies to tap into, it's worth exploring every option. As the table shows, low deposit/no LMI loans are available through several state governments.

Some, like Keystart home loans in Western Australia, let first home buyers get started in the market with a deposit of just 2% and no LMI. Conditions apply to all these loans - check the websites for eligibility. The interest rates on these loans are higher than for traditional mortgages, so it makes sense to refinance once you've built up some equity in the home.

This report was sponsored by Heritage Bank but was independently researched and written.

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A former Chartered Accountant, Nicola Field has been a regular contributor to Money for 20 years, and writes on personal finance issues for some of Australia's largest financial institutions. She is the author of Investing in Your Child's Future and Baby or Bust, and has collaborated with Paul Clitheroe on a variety of projects including radio scripts, newspaper columns, and several books.
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