January 12, 2022

How 1-in-10 First Time Buyers Manage to Buy Their Homes 4 Years Sooner

Currently, two federal government schemes are available to Australians looking to buy their first home. One is the First Home Loan Deposit Scheme and the other is the New Home Guarantee initiatives. Although these schemes are commonly perceived by the public as a generic home loan, they are so much more than that.

You can use any home loan calculator you can find online, but they won’t tell you how 1-in-10 first time buyers can manage to buy their homes in under 4 years or sooner.

In this article, we talk about the Australian Government’s initiative to provide eligible first home buyers with support, so they can buy their first home easily. This comes in the form of the First Home Loan Deposit Scheme and the New Home Guarantee initiatives.

First Home Loan Deposit Scheme and the New Home Guarantee Initiatives

The First Home Loan Deposit Scheme was launched in early January 2020 with 27 lenders (2 major, 25 non-major) offering eligible applicants with a guaranteed home loan. Whatever schemes were not taken during the financial year 2019-2020 were carried over and made available during the financial year 2020-2021.

The New Home Guarantee (NHG) was launched to aid first home buyers to purchase a new home sooner. The NHG was announced on the 6th of October 2020 and is part of the 2020 budget. The New Home Guarantee commenced on the 2nd of November of the same year with 10,000 scheme places released for the financial year.

Under FHLDS and NHG, all eligible first home buyer applicants can buy a home with a deposit that is as little as 5% because the National Housing Finance and Investment Corporation (NHFIC) guarantees the scheme lenders up to 15% of the property’s value.

This is if the house is financed by an eligible first home buyer’s home loan. Meanwhile, under the New Home Guarantee, it is necessary for eligible first home buyers to buy a newly built house or build a new one. 

Eligibility Requirements

For buyers to qualify, they first need to satisfy specific eligibility requirements that include a taxable income that is below $125,000 per annum in the previous financial year. This requirement applies only to single applicants. If the buyers happen to be a couple, the taxable income must be no higher than $200,000 per annum.

Additionally, the applicants need to agree that the property they wish to purchase will be subject to property price caps as set by the Australian Government. Buyers need to know that these price caps vary across Australia, schemes and financial years.

These two initiatives enabled 1 in 10 first-time homeowners during the 2020-21 financial year to bring forward their dwelling purchases by around 4 years under the FHLDS and 4.5 years under the NHG.

What’s Considered a ‘New Home’?

Eligible NHG properties include:

  • A land with a separate contract to build a new home
  • House and land packages
  • Newly constructed dwellings (an apartment, townhouse or freestanding house)
  • Off-the-plan dwellings (an apartment, townhouse or freestanding house)
Door look with key

Who Are the Beneficiaries?

With home loan rates consistently going higher, it is no wonder why more people are taking advantage of these aids to secure a permanent dwelling for themselves and their families. From 2020-2021, support under the FHLDS and NHG was mostly provided to the younger first home buyer demographic, with over half (58%) of all qualified buyers under the schemes to be below the age of 30.

This is significantly higher compared to 42% of recent first home buyers securing loans outside of these schemes. Additionally, although over half of the qualified buyers are under 30, the schemes also supported over 300 people aged over 50 to buy their very first property.

This trend was slightly different from the one observed from the previous financial year where guarantees under the FHLDS were given to buyers who were mostly 18-24 years old. That represents nearly 1 in 4 of all buyers (unlike the 1 in 6 trend back in 2019-2020). Meanwhile, under the NHG, more than 25% of all demand are from buyers above 35 years old and in general, tended to be older on average.

General Observations

The steadily rising home loan interest rates is one of the biggest factors why more people are seeking assistance through these schemes. Several patterns have been observed with the launching of these initiatives.

Buyers (Particularly Under the NHG) Were Willing to Move Far Away if It Meant Buying Their First Home

1. A sizable number of first home buyers under the NHG were more than willing to buy further away from their dwelling compared to those under the FHLDS. This suggested that a lot of purchases were more concentrated in outer greenfield areas.

It was observed that first home buyers under the NHG on average moved up to 13km away unlike those under FHLDS who moved only up to 8.4km on average. Under the NHG, some buyers were observed to buy as far as 90km from their previous residence.

2. Homes in the middle and outer rings of Australia’s largest cities were more affordable in general. This is the area most preferred by new home buyers who were approved under the FHLDS loan guarantee from 2019-2020. For reference, over 30% of Greater Sydney scheme recipients bought and moved into a new property at least 30km away from the central business district.

3. When the NHG commenced in the late 2020s, it was observed that over 50% of all the guarantees issued were under the two schemes for new homes. For the guarantees issued under the NHG, more than 75% were used for housing construction-related activities.

Applicants get screened mostly for the lowest home loan interest rate they can get. Although a home loan calculator or home loan repayment calculator online can be used to get an idea of this amount, it is still best to direct enquiries to the proper channels for a more accurate evaluation.

Home made of cardboard

The Schemes Were Able to Achieve a Broader Geographical Coverage

1. Under the FHLDS, the scheme had a strong representation from regional areas. This representation from the year 2020-2021 was able to remain stable with around 37% of all approved applicants moving outside major cities and into their new homes.

Compared to FHLDS, more people accessing the NHG were observed to buy properties in greater capital city areas.

2. In general, both FHLDS and NHG had strong representation across Australia, with first home buyers moving across all states. It was somehow observed that NHG saw a stronger take-up in Victoria, Queensland and Western Australia. Of course, this is also highly relative to population shares and other complementary initiatives rolled out in those areas.

3. Meanwhile, demand for FHLDS loans across Australia is more concentrated and stronger in the northwestern Melbourne area, particularly in Donnybrook, Mickleham and Craigieburn (over 109 guarantees issued). For NHG, Sydney’s northwest area which includes Riverstone, Marsden Park and Box Will took the largest guarantee volume at around 158 approved loans.

Key Workers Made Up the Significant Proportion of Support Given Under the Schemes

1. A substantial chunk of the financial support provided under these schemes were given to key workers. Key workers are defined as employees in services that are essential to a city’s functioning and earn low to moderate incomes. Their work roles require these employees to be physically present at the workplace and have no option to work from home.

Living close to the workplace is one of the main reasons why key workers made up a significant proportion of the first home loan deposit schemes and other home loans in Australia. Living nearby allows key workers to respond to emergencies or increase in service demands as well as cover shifts in case of a shortage in the workforce in welfare support roles.

Key workers can be nurses, midwives, disability caregivers, police, fire and emergency workers and more.

2. In total, the NHG and FHLDS have been able to aid over 3,700 key workers buy their very first home during the 2020-2021 financial period which translates to roughly 23% of all guarantees issued throughout the duration.

Out of these numbers, 35% are nurses, 34% are teachers and 11% are emergency service workers. This brings the actual number of supported key workers to around 6,000 since the schemes were launched in January 2020.

Aside from the benefit of reasonable refinance home loans and home loan repayments, probably the biggest advantage of this initiative is getting key workers closer to their places of work. This enables them to be more ready and accessible to the communities they serve, which means faster response times in case of emergencies.

The Schemes Supported a High Concentration of Younger Australians

The NHG and the FHLDS supported higher concentrations of younger Australians across all states, which also benefitted even those who are not within the prevailing age bracket. For example, in 2020–2021, roughly around 9 in 10 guarantees were given to buyers who were under 40. This included buyers who were 29 years old and below, which makes up around 57.8% of the total beneficiaries.

For the sake of comparison, we would like to include data on a survey of first home buyers who did not take part in this initiative. It showed that 41.5% were under 29 years old while 43.3% were people between 30 and 39 years. Additionally, around 300 guarantees have been approved for buyers in their late 50s and 60s.

The NHG Supported Strong Construction Activity

With the pandemic came several economic losses suffered across industries in varying intensities. The good thing with the help of NHG along with other government stimulus, NHG has supported strong construction activity as the economy slowly recovers from COVID-19.

Since the commencement of the NHG on the 2nd of November 2020, easily over 50% of all approved guarantees have been for the purchase of new homes, which means more people are slowly rebuilding their lives after the pandemic. Of all the NHG guarantees issued, 75% of applications were for construction-related activities.

Wood house model

The Schemes Recorded Debt Risk Improvements and Mortgage Serviceability

Over time, the schemes have been observed to slowly but consistently record improvements to debt risk and overall mortgage serviceability. This trend was also supported by falling interest rates and increased income levels in different sectors. A clear objective of the schemes is to provide financial support for Australian home buyers so they can enter the housing market sooner.

In this aspect, it is believed that the Federal Government succeeded.

It is almost certain that without access to these schemes or alternative financial means, first-time Australian buyers would have had to delay their home purchase by up to 4 years in order to allow more time to secure the 20% deposit. Under the NHG, this delay might even be higher and could go up to 4.5 years.

Loan to Value Ratio

The loan to value ratio or LVR refers to how lenders describe the amount you have to borrow to buy your first home but calculated as a percentage of the property’s “lender-assessed value.” The “lender-assessed value” is simply how your lender chooses to price the property you are interested in.

In general, a higher LVR percentage means a higher risk level to the lender. This will affect a borrower’s chance of getting approved for a home loan application. Anything over 80% is considered high and will prompt the lender to require a Lender’s Mortgage Insurance or a loan guarantor to offset any risk.

The LVR under NHG and FHLDS were concentrated at or around 95%, which makes it a high risk for lenders.

In a recent survey conducted among potential first home buyers, only around 19% were proposing to have a deposit of less than 10%.

Although the average LVR is lower for NHG (92%) compared to FHLDS (95%), the debt relative to the income is higher for NHG borrowers. This is probably due to the fact that the higher price thresholds under the NHG result in higher levels of debt.

In 2020-2021, it was observed that first home buyers under the NHG borrowed an average of 5.5 times their combined annual taxable income, while FHLDS applicants loaned roughly around 4.8 times their combined annual taxable income.

This means that compared to the previous financial year, the receiver of FHLDS approved applications have recorded a lower debt-to-income ratio from 4.92 to 4.78 in 2019-2020.

Other Considerations

These schemes are by no means the answer to all your first home questions. Remember that whatever advantages they offer will only cover the financial aspect of your housing concerns and not even all of them. There will be upfront costs and there will be a lifetime ongoing cost as well.

Although these schemes are designed to help low-moderate income Australians overcome financial hurdles that often stop them from buying a home, the lenders will still look at a borrower’s repayment capacity. Honesty plays a crucial role in getting approved and truth be told, it is better to be straightforward when it comes to these aspects.

If you do not fit into any of these schemes, do not fret because there are several government financial assistance programs initiated by the government. You can tap these resources and get the same successful results as the people under the schemes we mentioned previously.

One more thing, do not focus on securing a spot under these schemes. Be more open to your other financial options. Familiarize yourself with different types of loans. You will never know, maybe you can find the most fitting scheme for you there.

Remember, the NHG, FHLDS and FHG are just some of the many sources of financial support for your first home purchase. You should not think of them as your only option. Explore, compare and go with the one that best fits your long-term needs.

Small house models

How Does One Secure a Spot?

Now, it is clear to see why key workers and regular workers alike would be interested in these government initiatives. It means stability and long-term investments for first home buyers.

Unfortunately, the opportunities are not unlimited.

The good news is that NHG is yet to secure 10,000 spots. So far, only 2,443 spots have been given so there is still a good chance that your application will be approved if you wish to take part in this initiative.

The unfortunate news is that FHLDS spots are almost out with word that all participating lenders have already started creating a waiting list for whatever spots remain.

Financial options are not just available to solo individuals and couples. There are also provisions for single parents called the Family Home Guarantee or FHG. This allows single parents (if eligible) with dependents to buy a home or build one with only a 2% deposit and without the need to pay LMI.

There are also 10,000 spots to be secured under the FHG with 1,023 slots currently taken. The best thing about the FHG is that it does not require you to be a first home buyer, which presents several opportunities to single parents.

Do note that the FHLDS is an annual scheme, and 10,000 new spots will be made available by July 2022. More good news: the Federal Government has just announced that it will release an additional 10,000 spots by January of next year.

So, if any of the schemes we mentioned above interest you, consider getting in touch with What If We Finance today. We can walk you through everything you need to know about each and every scheme, so you will know what to prepare once you are ready to apply.

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