First home buyers are being urged to be careful about signing up a planned new scheme that dramatically reduces their required deposit to just 5 per cent.
Last week the biggest first homebuyer incentive in a decade — the First Home Loan Deposit Scheme — was announced, and was quickly welcomed by the mortgage industry.
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The Government said it would guarantee three-quarters of a typical 20 per cent deposit for first home buyers. This speeds up their saving time and eliminates the need to pay lenders mortgage insurance, which protects banks from defaults and often costs borrowers about $10,000.
It’s planned to start on January 1 next year.
Aussie Home Loans CEO James Symond said many young Australians were struggling to get their foot on the property ladder.
“Any support governments can provide to first home buyers is welcome,” he said.
“For some it can take a long time to save a 20 per cent deposit — only for the goalposts to move and property prices increase. It can understandably be a frustrating experience for many.”
Not everyone supports the plans, with some finance specialists warning that small deposits are risky.
Real Estate Buyers Association of Australia president Rich Harvey said first home buyers could be caught in negative equity if the property market continued to drop.
“It’s all well and good to jump on the property ladder as long as the ladder isn’t leaning on the wrong wall in the wrong suburb,” he said.
Financial adviser Scott Haywood said both political parties had made a “massive mistake” by enabling smaller home deposits, and the impulsive mentality of young Australians needed to stop.
“By allowing a 5 per cent deposit on a house, particularly in what now is a distressed market, there’s no incentive for people to pay off that house if they have lost money, compared with if they have put in 20 per cent,” he said.
“It’s vote chasing the youth … a 5 per cent deposit is taking us back to the GFC.”