5% Deposit for FHBs

There's plenty that can be done to negate this risk. Assessment rates are generally around 7.25%. Nothing stopping the government from making lenders qualify these loans at 9%. That alone would reduce the risk of default down significant, as well as limit the number of people who can actually apply.

It's actually not a bad idea. As it's a guarantee, it actually doesn't cost the government much at all. Negative equity is only as much a risk as the risk of default is and this decreases in a rising market. The most negative outcome would be if the expand the program too far and it starts to affect house prices.

 

So am I right in thinking this is effectively a Govt. backed LMI program? Competing with genworth and QBE but for qualifying fh buyers only? The banks allow a 95% lend instead of 80% and govt backs the banks for the difference in the same way as LMI does?

 

Don’t think lifting assessment rates on these loans would be a smart move given the intended market.

I’m actually generally interested what happens when banks need to repossess as it’s a guarantee to happen.
Guessing the tax payer foots the bill...?

 

All the announcements are very light on details, but I interpret it to be more like a family guarantee. The lender is secured by the property, plus a cash guarantee from the government. The net LVR is 80% so there's no LMI involved.

This allows the purchaser to borrow 95%-100% of the purchase price, but with an 80% LVR against the total security offered for the loan.

Not much risk for the government either. They know what the first home buyer default rates are. By offering $500M to this, if the default rate is 1% then they're really only risking $5M. Even at quadruple that, it's peanuts.

Higher assessment criteria reduces the risk of defaults and it means people aren't buying $1M properties (currently combined $200k income can potentially qualify for about $1.28M). There's a lot of checks and balances they can put in place to limit who gets it and the government exposure.

 

Lol...

 

Nice analysis, cheers. I don't agree with this kind of FHB policy, but it will be a nice boost for my property which is FHB type stock.

 

If you look at it a bit closer and assume that 50% of the 10,000 homes will be in Sydney and Melbourne and the other 50% split between the rest of Australia and Perth, Adelaide, Hobart,Canberra and Brisbane there is probably a huge amount of property in the 300k-400kstarter home market , does a family earning 150k-200k anually really need a leg up .
There going to buy a property anyway , but its just a last minute decision of desperation to save their jobs.

 

Looks like its a copy of this NZ product:
Home

If it is, key details:
- Its a lending product offered by chosen lenders, not a ‘family guarantee’ type arrangement on ‘any’ loan
- Lending criteria still applies from the lenders
- Eligible maximum income
- Purchase price cap per region
- 5% deposit (NZ requires 10%)
- NZ require LMI payable on 1%
- Must live in it, can’t own any other property etc
- Some lenders allowing construction loans

 

Interestingly the kiwi income limit is far lower ($85,000). It will be nice to see the regional price cap when compared to income limit. If the cap is comparatively low, those at the higher end of incomes probably are capable already, but are waiting for something closer to work/lifestyle.

It could very well soak up the unit over supply with the old ‘rent money dead money’ mantra.

 

Reading through the FAQ, it appears to be some form of LMI, sponsored by the NZ government. I believe that normally NZ doesn't allow lending above 80%, this may be some sort of exception to this via specific lenders.

It also talks about the HomeStart grant, which appears to be similar to the Australian First Home Owners Grant. The KiwiSaver scheme looks like a superannuation type savings scheme of which Australia has also tried several variants over the last decade.


Given that in Australia a first home buyer can potentially borrow up to 95% + LMI it seems a bit strange. Does this mean that the government is going to pay people's LMI premium? This scenario wouldn't be termed a 'guarantee' but rather an additional grant.

 

If you go through details on their site it appears that Housing New Zealand Corporation provides the lender LMI at a flat fee of 1% of the loan which is capitalised on the mortgage.

 

If a single person on $125k per annum or a couple on $200k per annum cannot save $60k (12% of $500k, borrow 88% plus approx 2% for LMI) over a couple of years, then there is something wrong with their spending habbit. They need to learn how to save first. The scheme should have a much lower income cap.

 

I dont see it like that

I recently had my parents go guarantor and thus I had no LMI

Purchase Price - $930k
Stamp Duty - $37k
Legals - $2,500
Fees - $500
Deposit - $40k
Parents guarantee - $200k
Total Loan - $930k
LMI - Nil

Effectively the government would replace the Parents guarantee. You're still loaning the amount however if you default and the property sells for less than the loan amount then the government will guarantee the deficit up to 15% of the purchase price.

The government isn't paying $1...unless a buyer/s defaults

 

@lynchy that's what I was suggestion in earlier posts. Reading the info on the New Zealand site, which the government has said this is modelled after, suggests that a guarantee of this nature isn't the way it's implemented. You have to dig into the FAQ to find it, but NZ seems to use LMI rather than a guarantee.

I think a guarantee is the better way to go for the reason you stated. It costs the government nothing unless the borrower defaults.

 

The simplest mechanism would be for the government to just be the LMI provider. Everything else remains the same, except there is no LMI premium.

 

Interesting that it could mean the government pays the LMI premium which means it is just basically another form of a grant awarded to those FHB who can’t/won’t save the extra money.

Can’t say I like this.
People will just leverage it when they don’t need to costing us tax payers money.

Scenario 1
A FHB has 20% deposit but decides to keep a buffer of cash and just let the taxpayer foot the LMI bill.

Scenario 2
A FHB stops saving or saves less because the tax payer can just foot the bill usually avoided by those who save hard to avoid LMI (basically awarding spending rather than saving).

 

Having 1000's of FHBs spending money within the local economy instead of stumping it up for the banks isn't entirely a bad thing...

 

Yeah Bunnings will love it!

 

Smashed Avo, to the moon!

 

For Perth or similar, I agree. My wife and I are the classic DINKS, have a modest $400k-ish house. We put one entire income on the mortgage, live off the other and have quite a good lifestyle.

$200k if earned 50/50 is $5640 after tax per fortnight. Assuming someone in this scenario rents at $800 fortnight, $2k generous for the remaining cost of living means 12 months for saving $67k deposit (give or take).

Granted this would be a high income household but at $140k + $60k combined it is still similar which in WA could be a FIFO worker and a partner on a middle/low income. I know quite a few families and couples on this kind of wicket who somehow are paycheck to paycheck though.