Trying to make sense of the First Home Buyer 5% Loan Scheme...

Discussion in 'Investment Strategy' started by NewAroundHere, 9th Jan, 2020.

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  1. NewAroundHere

    NewAroundHere Member

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    Hi everyone!


    Happy new year and hope all had an enjoyable holiday period.


    I’ve been lurking in these forums for a little a while and have a (large) question of my own that I would like some advice. The topic of my post is the First Home Buyer’s Loan Deposit Scheme (‘FHBLS’), AKA the 5% deposit scheme. For those unaware of the scheme more information can be found here: First Home Loan Deposit Scheme | NHFIC



    Background:

    I’m in my mid 20s and nearly two years out of university working in financial services in Melbourne. I put myself through university in a different state and so entered the workforce with minimal savings. I’m currently solo renting a 2 bedroom apartment in inner Melbourne. I had not thought of buying a property so soon (read: not enough deposit!) but the FHBLS now provides that opportunity (where today I have the 5% for a $600k property).


    However, I’m in the fortunate situation where I’ll only be eligible for this scheme until the end of this financial year as I will exceed the single income threshold next year. I appreciate the FHBLS scheme wasn’t designed for someone like me but it does present a unique opportunity which I think can make sense from a wealth building perspective. I outline this below and seek some feedback on from you all as I’m a novice when it comes to property.


    Investment Strategy & FHBLS:

    My investment strategy has been to be focus on low cost passive Vanguard index funds / ETFs with the view to hold for a minimum of five years. The introduction of the FHBLS seems to introduce added diversification benefits and more direct participation in capital gain upside not available in most index fund / ETF products.


    At the present moment my thinking about the FHBLS is as follows:

    - Added free diversification to currently nominal investment portfolio through real property holdings;

    - Buying a property with a 5% deposit with circa 3% interest rate allows me to put surplus savings into an offset or more likely into more index funds / ETFs immediately;

    - Given properties in Victoria for first home buyers under $600k see no stamp duty payable a purchase at the $600k or below level seemingly is a free kick on capital gains with CGT exemption on primary residence; and

    - Given I currently rent at circa $1.8k a month and intend to live in Melbourne for the foreseeable future a mortgage at or below $600k would cost me at this least amount up to $2.4k per month.


    I had previously considered buying a townhouse or home in south east Melbourne (i.e. no further out than Glen Iris) in approximately five years when I considered it would be reasonable for me to have a 20% deposit for a circa $1.5m - $2.0m home (hence the five-year index fund / ETF hold).


    I consider that a purchase of the FHBLS may augment this strategy by:

    - Providing an increase in equity value in five years and rental income if I were to continue to hold and buy a larger property or;

    - Sell for (hopefully) a capital gain to fund a further deposit on a larger property.


    I think these are highly dependent on the market growth and where the LVR position would ultimately be on a FHBLS property in five years time but this is related to individual property specifics somewhat (next section!)


    My questions in this section would be:

    1. Only transaction costs on a FHBLS purchase would be conveyancing and loan establishment costs of c. $5k?

    2. Does my thinking make sense on the FHBLS as an opportunity? Am I overlooking anything important?

    3. What are the appropriate considerations for sizing an offset account balance? I think there is an opportunity cost trade off, i.e. money should be in equities at some point as 3% interest is less than potential gains in the share market over time. Is there a rule of thumb for this?

    4. Fast forward five years assuming I bought a FHBLS property and I was looking to my Glen Iris house. How would a bank think about the FHBLS property? What LVR would that loan need to be at to allow me to get another loan? Assuming I had the deposit and income servicing capacity separate to the FHBLS property.

    5. Are there any cautions you would give with this strategy? My view is that the property needs to make sense on a standalone basis, i.e. I won’t let the financial incentive of the FHBLS be the deciding factor in buying a property – the property has to make sense from a fundamentals perspective.


    FHBLS Property Strategy:

    My thinking on a purchase of an FHBLS property is where I would seek some input as I’m in two minds about what makes the most sense. I would exclude buying a property in a high-density development and buying a studio or one bedroom property. I would preference properties near railways and walkable retail amenity.


    Strategy 1: Buy for land in middle ring Melbourne (i.e. two-bedroom house product in Chadstone / Balwyn North etc., restricted by price point cap of $600k anything in inner Melbourne).


    Strategy 2: Buy for lifestyle and re-development potential (i.e. buy a 2-bedroom apartment in 1950s-1970s block of 6 – 12 in Hawthorn / Kensington etc. with medium term redevelopment potential in inner Melbourne).


    Strategy 2 seemingly makes more sense to me on the basis that its suited more to my lifestyle now (inner city focused). A property that fits this bill would be something you could do small redevelopment renovations on to increase value over the five-year time horizon and is something that would remain desirable from a rental perspective in the longer term (in my view).


    This is where I need some feedback and assistance. I’m not really sure how to think about which one of these strategies makes more sense given my goals. I would appreciate some prompting questions so I can reflect and come back with more focused questions.


    Thanks all for reading if you made it this far and thanks in advance for those kind enough to respond to my post.


    Best,

    NewAroundHere
     
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  2. Morgs

    Morgs Well-Known Member Business Member

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    Welcome to PC!

    Your thinking makes sense to me, the only inhibitor at this stage is that the word is all the January FHLDS spots through CBA/NAB have been allocated. There is a second release 1st of Feb through the remaining smaller lenders, but the scheme is also worded like there may be another release in July.

    In relation to your questions:
    1) Correct!
    2) As above re: spots
    3) Once you have enough funds in offset you could look to debt recycle (there are plenty of topics on this here) but given it will be 95% LVR this may take some time to get to that position
    4) LVR on existing securities is not a consideration - the servicing capacity is the most important piece (if you can afford to service the existing debt + new debt - on the plus if you're holding as an IP you'll have the rental income to help). Don't forget you also need the deposit for the new purchase (which may be point #
    5) Aside from above considerations you'd obviously need to make sure it is a quality asset. You'll be competing with lots of other motivated FHBs in the market so finding value may also be a challenge.
     
  3. NewAroundHere

    NewAroundHere Member

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    Thanks @Morgs for your response, much appreciated.

    Interesting data point you note on places. I understand that many people are approved for the scheme but this doesn't mean that places are unavailable. My understanding is that a property purchase needs to be completed in order to absorb a spot as opposed to just pre-approval.

    My intention is to get pre-approved with the cheapest of the nominated banks (5,000 further places opening from Feb 1) that provide an offset accounts (quoted 2.98% interest rate) and hopefully make something happen in the month of Feb.

    If I could pick your brain further in terms of the specific property strategies I listed - what do you think makes more sense?
     
  4. Morgs

    Morgs Well-Known Member Business Member

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    My personal preference (not advice) is to go for strategy 2. I had the same question myself circa 2006 in Melbourne and went for a 2 bedroom unit in Richmond in a small block with some value add potential. At the time the intent was LT hold, and also somewhere to live that I liked.

    Has had strong CG and always in high rental demand, but to be fair I have not looked at how the other options (house on land in suburbs) have performed over the same period. I'm also not sure in strategy 1 if you'd be able to get anything with a tangible (useable) land size for future development etc.
     
  5. Trainee

    Trainee Well-Known Member

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    Playing devils advocate, is this whole thing a good idea or will fhbs just end up buying without the right financial discipline and buy some inflated stuff right at that price limit?
     
  6. Maximus

    Maximus Well-Known Member

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    Its definately not a good idea.
    I can't personally say how the price is moving overall but the agents who manage property for family have said the same thing, anything within the cap has seen alot more competition so there is definately more demand.
    Not just first home buyers but selling in general is apparently doing much better.
    Property i was looking at has already had several over market offers, comparables last year sold for 430-460 the owners now want 500k (Same agent confessed they are greedy kids selling a deceased estate).
    Im at the stage where i think i will hold out unless something good comes along, i dont want to compete with all the kids who think they are getting a 15% discount on a property.
    Last year was a good year to buy for first home buyers, not so sure about this year.
    Also from what i understand there will be a further 10,000 spots available come July so thats 20,000 spots for the year.
     
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  7. Trainee

    Trainee Well-Known Member

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    It was a good time to buy last year...... with hindsight.

    sure didnt look like it back then.
     
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  8. Maximus

    Maximus Well-Known Member

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  9. Trainee

    Trainee Well-Known Member

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    Saying I just want a ppor, not trying to make money from it and i dont care if it doesnt go up just isnt a realistic option in a lot of places. If you dont play the game, your going to get steamrolled by those who do. Or you need to move cities.

    But you of all people have the skills to make money from property? Buy a run down place, fix it up. The reno strategy works best in a rising market.
     
    Last edited: 13th Jan, 2020
  10. Maximus

    Maximus Well-Known Member

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    Yeah im keen to get some skin in the game.
    Very recently been seriously considering a fire damaged property that has been on the market for a while.
    If i can purchase 100k below market (currently listed around 70k below market) an easy 50k renovation (brick structure) will make it very neat leaving a potential 50k profit even if the market stays static.
    It has no development potential other than a house and the surrounding houses are all single storey.
     
    Last edited: 13th Jan, 2020
  11. Carol M

    Carol M Well-Known Member

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    My daughter wants to apply for this very soon. As she has a low income, any tips which lenders available from 1 Feb are kinder on serviceability, AND on a gifted part of deposit. She will have had about 10% in bank account for almost 3 months. Will most lenders be OK after 3 months?
    Thanks
     
  12. NewAroundHere

    NewAroundHere Member

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    Hi all,

    Just wanting to bump this thread with an update and some further queries.

    Update:
    - I was able to secure both a place in the FHDLS in early February and a loan pre-approval. Both approvals are valid until c. mid May when I otherwise will need to re-apply to the scheme (i.e. if I don't get a property contracted by mid May I will need to re-join the back of the queue for a place in the scheme. This would mean for me I would not be able to participate in the scheme again due to income eligibility constraints).
    - I've been actively looking and bidding on three properties in line with Strategy 2 and two property in line with Strategy 1, per my initial post. Suffice to say I've had no success to date with all the properties going for well above the 600k cap (all auction results ranged between 645k - 770k with pre-auction guides of 500k-550k or 550k-600k).
    - At the present moment I'm having discussions with two vendors about purchases of apartments in inner Melbourne (i.e. three suburbs from CBD) respectively (i.e. pursuing Strategy 2) and I outline my thinking and queries below.

    I suppose I have a couple questions in terms of both my investment strategy and property specific comparison below.

    Starting with the bigger questions:
    1. Should I be constraining myself with a mortgage of an apartment now (ultimately for investment) if my goal is to buy a PPOR in the $1.5-2.0m range in 5 years?

    I feel the scheme is a free kick for the reasons I outline in my prior post but the ability to refinance the apartment to an investment loan is constrained under the scheme. Should the LVR not be 80% or below in year 5 I would be looking at paying LMI and also converting to an investment loan to enable me to get the PPOR as owner occupier. The property at the 600k level is also likely to require cash funding of c. $15k per annum / will be negatively geared. The concern here is that I would have a negatively geared property at a high (above 80%) LVR that will impact my ability to service the PPOR property I want.

    2. Is the situation I outline a big concern in general or am I overthinking it? Not something I know how to think about. I back myself on the income front to get where I need to get the PPOR, I'm just bringing forward an investment property purchase as a result of the scheme (i.e. no scheme I'd just hold on / invest in equities for 3 to 5 and the PPOR and buy an investment property in 7 or so years).
    3. Is this the right strategy for property wealth building? Or am I better off just sticking to the PPOR plan (i.e. continue renting and invest in equities now for 3 to 5 year hold)?

    I appreciate this is largely property dependent and so I outline my two current options below:

    Property 1:
    - 1 of 15 in a 1960s block (and the second best apartment in the block from an aspect perspective).
    - One of the best streets in a great suburb
    - Floor plan is not efficient and c. 65 sqm
    - Awkward / very tight car parking arrangement down laneway.
    - Requires new bathroom and other minor reno works (painting etc).
    - Close proximity to train station and tram (c. 5 min walk)
    - Challenging owners corp based on my read of the minutes and large building replacement works likely need to be undertaken (i.e. high special levies)
    - Proximity to new development high rise stock (c. 1000 apartment completed between 2013 - 2018) less than 10 minute walk.
    - Price slightly high for the area / recent comps given the works required.

    Property 2
    - 1 of 24 in a 1970s block (and the best apartment in the block from aspect / natural light perspective).
    - Grungier area in an otherwise sought after suburb
    - Floor plan is efficient and c. 67 sqm
    - Fully freshly renovated and no further renovation works would be required.
    - Close proximity to tram (c. 2 minute walk) and train station (c. 5 min tram or 15 minute walk).
    - Proximity to new development high rise stock (c. 1000 apartment completed between 2015 - 2020) less than 10 minute walk.
    - Very full price for the area / recent comps with c. 50k overs being paid, i.e. paying a full price as a result of the renovation being completed.

    In summary Property 2 is $10k more expensive than Property 1 from a list price perspective. The holding costs (excl. any special levies for building works) are pretty much the same. I would anticipate needing to spend about $20k on a bathroom renovation (excl. any special levy amounts) on Property 1 and $0 on Property 2 in the next three years. The rentals for each would be near enough the same in the medium term in my opinion.

    3. Based on the above which property appeals to you more and why?
    4. Should I pass on both if I'm hitting the 600k cap for an apartment (i.e. don't expect any capital growth for at 10+ years) and go back to Strategy 1?
    5. What do you think will happen in the coronavirus world to property prices? Should I hold off a further month and see if I can make something happen in a short period of time?

    Thanks for your time and consideration.

    I've tagged some members in this post who've previously responded and others who I've found their posts to be insightful (and any responses would be highly appreciated)!
    @Morgs
    @The Y-man
    @Sackie

    Best and hope you all remain healthy / safe.

    NewAroundHere.
     
  13. Trainee

    Trainee Well-Known Member

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    Thats a significant jump. You have minimal savings. How do you intend to get to 1.5-2m PPOR in 5 years? Are you expecting a significant rise in income? You would also need a lot more deposit. Generally, between buying a 600k first property with minimal deposit, and buying the 1.5-2m PPOR, there is a first upgrade step.
     
  14. NewAroundHere

    NewAroundHere Member

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    Thanks for your prompt response @Trainee.

    Appreciate your concern re income but interested in specific responses to my queries if you would spare some more time to turn your mind them.

    The short answer to your question is that I work in an area of finance with a proven renumeration track (if you perform) and I'm backing myself to be able to hit that track.

    I can also contribute more than the 5% deposit today and I'm just electing not to. I prefer to put everything else (excl. 6 months of emergency cash in an offset) into the equities markets.

    Interested in your further thoughts :)
     
  15. Morgs

    Morgs Well-Known Member Business Member

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    There are lots of questions and to be honest the best person to answer them is going to be you... :) So in that vein I'll share my thoughts and hopefully stimulate some thinking.

    1 & 2) If you're currently under the FHLDS income threshold and you need to come up with $516K to cover deposit & costs for a $2m OO purchase in 5 years where will the deposit come from and where will the servicing come from for a $1.6m owner occupied loan? You may need to work that bit out to help determine what you can do in the interim (maybe you already have).

    3) It it a strategy... What do your rent vs. buy numbers look like comparatively as you need to live somewhere? Do you have the capability and motivation to renovate to add value? What is your outlook for property price growth vs. equity price growth? Which path helps you get toward your goal better based on the numbers?

    4) What about property #3 which is a motivated vendor in a smaller block with no strata issues? (shouldn't be too hard to find in the coming months)

    5) The situation is evolving day by day but at a principal level those who are in resulting hardship will lose money and those with servicing and equity will grow wealth.
     
  16. NewAroundHere

    NewAroundHere Member

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    Thanks @Morgs for your prompt response also.

    In response to your points:
    1. I was under the FHLDS income threshold last year financial year. This financial year I'm already materially over the the income threshold. In relation to deposit it will be a combination of salary increase but mainly bonus payments. Based on my experience last financial year for renumeration I am confident I will hit that requirement in 5 years. I'm very fortunate to have the job I have (but I do work pretty hard also)!

    3. My rent vs. buy analysis on either property is pretty much the same. I'd be c. $300 worse off a month buying vs. renting today. I currently solo rent a 2 bed apartment (many interstate family visitors) and buying at the 600k price point would mean so long as I rent out the second bedroom in the place I bought for c. $700 a month I would be no worse off than I am today. In my current rental situation if I eschewed the spare room and went to a share house that would mean rent > buy, but I don't want to do that from a lifestyle perspective.

    Capital growth is modest at best in each area. Renovating I'm open to one major room (kitchen or bathroom) but again prefer all surplus cash to be plugged into equities if possible. I've never renovated before so that's also weighing this point.

    4. I agree re property #3. My concern though is time. As noted I only have until mid May to get something contracted otherwise I miss out on the scheme. I will keep a look out while I can...

    5. Yes but fingers crossed it gets better soon for everyone who is enduring hardship.
     
  17. Morgs

    Morgs Well-Known Member Business Member

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    Then I would just do the numbers to make sure by doing this it will help accelerate your long term objective. Based on your numbers the break even over the next 5 years is only $3K per year additional holding cost. Do you think you'll get a ROI on that? How does that compare to your equities outlook?

    Hopefully the environment in the next 5 years will be one rich with bonus payments. I think saving $520K in 5 years after tax is challenging for many.
     
  18. NewAroundHere

    NewAroundHere Member

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    Hi everyone

    Just wanted to provide an update to my thread. TLDR: I bought a property and I wanted to say thank you to everyone who provided feedback on my thread, renovation journey (and thread?) to begin soon!

    Since my last post at the end of March I spent the next few months continuing to search for a property. I was able to take advantage of the COVID extension to my place in the FHBLS to the middle of August. Fortunately, I was able to find a property in mid July and have now gone unconditional on the purchase.

    I ended up buying an apartment in the low $470s in Hawthorn, VIC around 100m from Swinburne Uni and a 4 min walk to the nearest train station. The apartment is a 2 bed 1 bath 1 lock up car and is one of five apartments in a 1970s block with a highly efficient floor plan. The apartment is on the top floor north facing (but no balcony) and is set two streets back from the main road on a tree lined street. There is a heritage overlay to the main street front so nothing is getting built up in front of the north facing aspect!

    The apartment however requires considerable renovation works (i.e. bathroom and kitchen). The facade of the building itself requires re-rendering and the owners corp has raised 90% of the funds to date to complete these works. So the property does need a lot of work!

    The agent price guide was $485k - $525k. I was fortunate enough to secure the property in the low $470s as there was only one other offer received at the $485k level but with a 6 month settlement. I was also pleased that the bank valuation comps all came in between $515k - $535k. I contracted right as the case numbers in VIC were increasing materially again which I think helped get the vendor over the line quickly!

    I should probably say this type of property is one I didn't think I would buy going into this experience (i.e. something that needs renovation works and also buying something without a balcony). I still intend to live in this property for the next 3 to 5 years before I upsize to a larger family home (but hopefully in 3 years)!

    However, due to COVID I determined that my strategy needed to change. I still wanted to take advantage of the scheme if I could find the right property (i.e. after August I'd be ineligible and back to the 10% deposit + LMI world), but considered the possibility of catching a falling knife in terms of prices / overpaying today to be a big risk (on the basis I want optionality to potentially flip in 3 to 5 years).

    Based on what I had seen in the last 9 months of observing the market I considered that prices were very full pre COVID and with COVID19 fewer and fewer properties were coming to the market (except medium to high rise investor stock). I also observed on three occasions, in my opinion, extraordinary results for fully 2 bed 1 bath 1 car renovated apartments (i.e. bought 2 to 3 years ago for c. $450k with sales pre and during COVID of up to $680k).

    Based on this evidence I decided that taking that renovation cost / time / effort risk seemed to be rewarded (if executed well and of course if timed to the market well). So I adjusted my strategy away from buying at the 600k price point (max under the FHBLS scheme) to buy something 'cheaper' and then renovate.

    But important considerations for me in a world where renovate / flip is not practicable or achievable in 3 to 5 years at the right value or that I may decide to hold the property longer term, the rental potential of the property was also a key factor. Given the proximity to Swinburne I was a little surprised to see that the property in its current state (i.e. not very nice I think!) most recently rented in January 2020 for $400 per week. At this rental rate the mortgage effectively washes itself and so I considered that this limited downside risk (although acknowledging serious downward pressure on rents for next 12 - 24 months), that proximity to Swimburne is always going to be desirable to someone to rent longer term.


    Anyway... the above in bold is how I managed to convince myself the purchase was a good idea! Interested in any thoughts if I've missed some key points in my thinking above.

    Otherwise I've now implemented my investment strategy having dropped the vast majority of my cash into equities in early April (which has turned out well so far!). I've budgeted 40k for the renovation works and so now the next 36 months will just be building up for deposit #2 (and opportunistic equities buys)!

    Thanks all for advice and feedback to date, much appreciated.

    Hope everyone remains well during these challenging times.

    Regards,
    NewAroundHere
     
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  19. NewAroundHere

    NewAroundHere Member

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    Hi

    Hope everyone remains healthy and happy!

    Having been trawling the forums for the last 12 odd months I noticed that sometimes people bump threads with general updates for those who commented to see how the property journey was progressing or ended up.

    Along those lines just wanted to bump this thread once more. I seemingly got a bit lucky at the time I entered the market last year! An apartment in the building next door to mine (same floor plan, same building style, number of apartments etc.) sold earlier this month for c. 50k or c.10% more than I bought back in July 2020. The apartment next door had a renovated kitchen so even adding 15k to what I paid for mine still indicates that I could've done worse and I got more than a little lucky.

    Thanks and working on researching the next one so another thread soon!

    Best,
    NewAroundHere
     
  20. jaybean

    jaybean Well-Known Member

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    You also did well in terms of the property you bought, instead of buying some flashy new OTP thing.
     

The shift to the regions has been quite profound with Millennials and Gen X leading the way. It seems affordability, lifestyle, and working from home have been the key drivers from which these generations have been able to take most advantage.