A helping hand to step into your first home

Struggling to save for a 20% deposit on your first home? A recent Australian Government initiative may allow you to buy your first home with a much smaller deposit, helping you take that first step to home ownership years sooner.

What is the First Home Loan Deposit Scheme?

The First Home Loan Deposit Scheme (FHLDS) provides lenders with a Government-backed guarantee that allows some eligible first home buyers to purchase a home with a deposit of as little as 5%.

Who is eligible?

  • Australian citizens over the age of 18 who have saved at least 5% but less than 20% of the value of an eligible property. If applying as a couple, both must be Australian citizens.
  • Genuine first home buyers who have not previously owned or had an interest in a property in an Australian home either separately or jointly with someone including residential strata and company title properties.
  • Singles with a taxable income of no more than $125,000, or couples with a combined taxable income of no more than $200,000.
  • Owner-occupiers only. If you move out of the property it will cease to be covered by the scheme.
  • The price of the property must be less than the price cap. Price caps range from $250,000 in rural South Australia to $700,000 in Sydney and some other parts of NSW.

All of these criteria must be met.

What are the benefits?

Normally, lenders require home buyers with a deposit of less than 20% of the purchase price to take out mortgage insurance. This helps to protect the lender if the borrower cannot repay the loan. Under the FHLDS the Australian Government provides a guarantee to the lender, which means you won’t need mortgage insurance. That saves you money, but more significantly, because you don’t need to save as big a deposit, you’ll be able to buy your first home a lot sooner.

What are the disadvantages?

Purchasing a home with a smaller deposit means you will need to take out a bigger home loan, leading to greater total interest payments over the life of the loan.

Will all eligible home buyers benefit from the scheme?

No. Only 10,000 applicants are expected to receive support each financial year. Currently, around 108,000 homes a year are sold to first time buyers, so chances are that, even if you meet all the qualifications, you may not receive approval under the FHLDS. It is, however, still worth applying. Keep in mind that the settlement date for your home loan must occur within 90 days that your home loan becomes guaranteed under the Scheme .

Can the FHLDS be used in conjunction with other first home buyer incentives?

All states and territories offer support to first home buyers, mainly in the form of the First Home Owners Grant, which is basically a cash handout, and in reduced stamp duty. These can be used in conjunction with the FHLDS. Be aware, however, that different eligibility criteria apply to each scheme and that limits and thresholds vary from state to state. Some incentives only apply to newly built homes, and property value cut-offs may differ. Depending on personal circumstances you may be eligible for some schemes, but not others.

How do you apply?

The National Housing Finance and Investment Corporation has appointed a number of major bank and non-major lenders to provide loans under the scheme. Search for “FHLDS participating lenders” to find them.

Applications are made through participating lenders and their authorised representatives, including mortgage brokers. These lenders and brokers will be able to assess your eligibility for both the FHLDS and other first home buyer incentives, and guide you through the application process.

Get in touch with our team for more information!

Is paying your mortgage off quicker really the best option?

Not so long ago one of the most effective, low risk wealth creation strategies was to use spare savings to pay down a mortgage – either directly or via the use of an offset account. If your mortgage interest rate was 8% per annum (that’s the effective, after tax investment return) the strategy delivered, substantially reducing the term of the loan and delivering big savings on interest.

But what about now? With home loans being offered at interest rates of less than 4% pa, does using surplus savings to pay off the mortgage still make sense? Or is it better to contribute those savings to an investment that may provide higher returns? Let’s see what we can learn from Emma’s situation.

Emma is a 45-year old, single professional with a $200,000 mortgage on her home. The home loan interest rate is 3.4% pa, and Emma’s marginal tax rate is 39%, including the Medicare levy. Following a recent promotion, she has a savings capacity of $2,000 per month, plus annual bonuses. Her only other debt is $10,000 on her credit card with an interest rate of 20%. Emma has a healthy superannuation balance for her age and does not want to contribute more to super.

 

So, where to from here?

Although a relatively small amount in dollar terms, by virtue of its high interest rate the credit card debt should be cleared as soon as possible. The rules of managing high interest debt are simple: pay off the debt with the highest interest rate first and work down to the lowest interest rate debt. If possible, consolidate all debt at the lowest interest rate. In Emma’s case, if she can redraw some funds against her home loan, she should do so to pay off the credit card.

 

Doing better

With the credit card completely paid off, Emma’s attention now turns to how to make the most of her savings ability. After looking around, she’s identified a number of investments that have consistently produced returns of more than 3.4% pa. Wouldn’t they be a better option than paying down the mortgage?

They may well be, but there are two important things that Emma needs to consider: tax and risk.

 

Tax

Extra payments made to the mortgage provide Emma with a net return, after tax, of 3.4%. But if Emma contributes her savings to a purely income paying investment, that income will be taxed at her marginal rate of 39%. To earn 3.4% after tax, Emma’s investments need to earn 5.57% pa before tax.

If Emma opts for investments that provide a mix of income and capital growth, such as shares and property, the tax situation becomes a bit more complicated. Tax on any capital gains isn’t paid until after the investments are sold, and if held for more than 12 months, Emma will benefit from the capital gains tax discount.

Even without these tax perks a targeted return of greater than 5.57% pa is one that Emma can realistically aim for, as long as she is comfortable with the risk.

 

Risk and return

A fundamental ‘law’ that investors can’t avoid is that higher returns come with higher risk which is more common with shares and managed funds. Paying off the mortgage is about as close to a risk-free return that Emma could achieve. However, in the current environment, Emma may well feel that pursuing the higher returns from an investment strategy is worth the greater risk.

What’s right for Emma isn’t necessarily right for everyone else. Age and stage of life, health and overall financial situation all influence the level of risk we may need or want to take on.

Is paying off the mortgage as quickly as possible the best option? It  depends on your situation. And it doesn’t need to be all or nothing. A blend of paying down debt and investing may provide a happy median.

 

Got some spare savings capacity? Your Bridges financial planner can help you work out a wealth creation strategy that’s right for you.

The holiday home romance

We all know the feeling. The sun is shining, the waves are lapping peacefully on the shore, there’s a cool ocean breeze wafting gently through your hair and the crisp sand is etched between your toes.

Sometimes you wish your holiday romance could last forever.

Technically it could!

Hundreds of thousands of Australians own their holiday getaways. With the temptation to escape the daily grind, a holiday home can be a very rewarding purchase.

But do holiday homes make a good investment?

When it comes to investing in property, it’s easy to let your emotions rule. However, before you make any snap decisions you should consider the benefits and risks associated with this kind of purchase.

 

The benefits

  • Free accommodation when you go on holidays.
  • You will have a home-away-from-home with unlimited access (depending on tenancy arrangements).
  • You can rent your holiday home out for the portion of the year that you don’t intend on staying there to help mitigate some of the costs. This can be particularly beneficial during peak seasons.
  • Your holiday home may increase in value over time. The potential for capital growth on property investments is generally higher than that of cash and fixed interest investments depending on the property.
  • You can claim a tax deduction for expenses incurred in maintaining your holiday home for the period of time it is rented out.

 

The risks

  • Occupancy rates fluctuate. Strong demand for holiday homes is on average around 8 to 10 weeks per year – and this is dependent on location. Demand for homes in a warmer climate is more consistent (especially if it’s beachfront).
  • If you rely on income from peak holiday seasons you won’t be able to use your holiday home during these times, e.g. during school holidays.
  • You may need to take on a significant mortgage as holiday homes can be quite expensive.
  • On top of the initial cost of buying the property you will also need to consider the costs of maintaining the property, including management fees.
  • Any net rental income earned and assessable capital gain when you selling your holiday home will be taxed at your marginal rate.
  • If there is a property market downturn, holiday areas are generally the first to suffer and the last to recover. If you have chosen an area, do thorough research on past cycles and how they have affected local prices.
  • You might get bored visiting the same place over and over. On top of this, you may even feel guilty if you holiday somewhere else!

 

Investing in any type of property is a big decision. When considering purchasing a holiday home, you should try and think a little less with your heart and a little more with your head. Seek professional guidance before making any big decisions.