18/12/2019

Housing affordability continues to sit atop the list of hard-to-solve political issues in Australia. In late October, 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.

Last month, Treasury released an exposure draft of the investment mandate that would govern the FHLDS. This draft mandate was finalised on November 11, 2019 without significant amendment. With this in mind, we will first look at the nuts and bolts of the FHLDS in November’s Technical Journal. In this month’s Industry Insights we focus on the historical context of the FHLDS, as well as some of the potential issues with, and opportunities presented by, the scheme.

So, let’s start with how the scheme will work.

The scheme in a nutshell

Under the scheme, the National Housing Finance and Investment Corporation (NHFIC) will provide 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 will commence on January 1, 2020 and a limit of 10,000 guarantees per financial year applies. Guarantees would be applied on a first-come, first-served basis.

In practice
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%, 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:

  1. It is provided by an eligible lender,
  2. There are no more than two borrowers,
  3. If there are two borrowers, they are spouses or de facto partners,
  4. Each owner is a first home buyer and will occupy the home,
  5. The loan is to purchase residential property which does not exceed the price cap,
  6. 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),
  7. If the loan is to buy land it must also be to build a home on the land,
  8. The loan to value ratio is between 80 and 95 per cent.

In practice
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 2 joint purchasers can pool their funds and no specific relationship between the purchasers is required.

Eligible Loans

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 Commonwealth Bank). Only two of these banks may have any FHLDS guarantees applied to their loans in a given financial year, and a maximum 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:

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.

Price cap

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 investment 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
  • 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 ABS is available here.

Value

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.

Guarantee limit

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 of purchase.

The scheme will not be a financial product

Along with the draft mandate, draft regulations were consulted upon by Treasury that would exempt the scheme from being considered a financial product. As such, the recommendation that a client apply for a FHLDS guarantee will be 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 an adviser to provide any specific guidance on the loan to a client, they will need to operate under an Australian Credit Licence.

Change is inevitable

The investment mandate may well be subject to change before the FHLDS is launched. That said, the current rules do provide a good insight into the broader shape of the scheme and how it will apply to clients. Keep an eye out for this month’s Industry Insights where will discuss some of the deeper issues arising from the FHLDS.