Buying Your First Home: What the New Home Guarantee Means for You
It’s no secret that buying a brand new home is a costly endeavour. That’s why many people seek out ways to lower the expense. If you are planning to purchase a house, you probably already know that there are government programs that you may qualify for. One of which is the New Home Guarantee. Whether you have heard of it or not, it’s something that you should truly know about.
Without further ado, let us discuss the New Home Guarantee (NHG) initiative and how you can potentially benefit from it.
What is the New Home Guarantee?
If you are familiar with the First Home Loan Deposit Scheme (FHLDS), New Home Guarantee (NHG) is its revamped version. It is an initiative from the Federal Government where the goal remains, which is to assist first home buyers in building or purchasing a new house. The premise is that NHG allows buyers or builders of new homes to provide as little as five per cent on their deposit. Through the program, there is no need for Lenders Mortgage Insurance (LMI).
Ordinarily, if you wish to buy a new home, you are required to put down a 20% deposit. Unfortunately, many people find this requirement difficult to achieve, particularly first home buyers. The solution the government has provided involved several initiatives to address this issue, including the New Home Guarantee.
The concept of NHG is nothing new. But according to the government’s analysis, past programs helped Aussies purchase homes four years earlier than without the aid. With the NHG, people can own a home four and a half years earlier. As mentioned, new home buyers can purchase a house with only a five per cent deposit in contrast to the traditional 20%. The remaining 15% balance will be guaranteed by the National Housing Finance and Investment Corporation (NHFIC).
How Does the NHG Differ from the Previous FHLDS?
The First Home Loan Deposit Scheme was largely popular all over the country, including WA. Many West Australians were able to take part in the incentive, receiving a helping hand from the government to pay for their new homes. The NHFIC issued a report demonstrating that 1,500+ guarantees were dispensed in 2020-2021 for WA. Still, there is a lot that needs to be done. That’s why the NHG was recently introduced.
But there is an important note to understand with NHG. Under this new scheme, recipients of the grant can only qualify if they purchase a brand new house. Therefore, the eligible properties include newly constructed
- House and land packages
- Off the plan dwellings
- Land with an individual contract for building the new property
Another thing that should be underlined with the NHG is that the property you plan to purchase should be within the price cap. Remember that price caps greatly vary between locations. For example, in Perth, prices are capped at $550,000 and $400,000 for the rest of the state.
How Does the NHG Scheme Benefit You as a New Home Buyer?
High prices of houses are an ongoing problem anywhere in the country. It is a problem that poses a barrier for several Aussies entering the housing market. In particular, young people are the ones who find it difficult to purchase new homes because they can barely afford the price. Adding to the total cost is the expensive Lenders Mortgage Insurance, along with many other fees.
Before you apply for the NHG incentive, answer the following questions first:
- Do you wish to own your first home sooner?
Most likely, your answer to this question is a “yes.” Recipients of this scheme can purchase their first home sooner rather than later, an average of four and a half years earlier than those who do not qualify for the initiative. The NHG may exactly be the benefit you need to jump into homeownership. And with lower interest rates, you have the advantage of paying lower fixed home loans. That means monthly repayments are more affordable than ever for the next two to three years.
- Are you willing to purchase from the available stock?
More and more renters are transitioning into becoming a homeowner. That’s a good thing but can also affect your choices as a home buyer. Because more people are trying to purchase a house, you have fewer home selections. The house you want may be already out of the market because properties are selling like hotcakes. Unless you are open to purchasing from another area, you could face more expensive options.
- Are you worried about LMI?
With NHG, not anymore. And this is one of the biggest selling points of the scheme. Lenders typically charge Lenders Mortgage Insurance if you pay for a home deposit of less than 20%. The reason behind the charge may vary, but it’s primarily due to the higher chances of the loan amount surpassing the home’s value. This is known as negative equity, which lenders are not fond of.
With negative equity, there’s a huge risk to the lender since they might not recover the amount that the borrower owes them in case of default. In other words, LMI exists to protect lenders from the mentioned scenario. Therefore, it has no real benefit to the borrower per se. Nevertheless, as a borrower, you are required to pay for this amount for insurance, and it is not cheap as it often costs tens of thousands of dollars.
- Are you confident that you will be diligent in making your repayments?
Providing a five per cent deposit leaves 95% on the home loan. Therefore, you have bigger repayments to make compared to delivering 20% or more on deposit. So, while there are benefits to the lower deposit, it’s essential to acknowledge the risks associated with it.
To make things clearer, let’s have an example. Let us say that you are purchasing a $500,000 property. With the NHG, you can pay $25,000 as a deposit. You can then take out a $475,000 loan, which will help cover the difference. This loan has a 2.3% interest with a 30-year loan term. If so, you will end up paying approximately $1,827 monthly, accumulating $183,010 in interest payments.
On the other hand, let’s say you did not qualify for NHC, which means you have to put down a 20% deposit. So, you pay $100,000 and take out a loan of $400,000. Using the same rates above, your total payments will be $1,539 per month, with $154,113 of it going to interest.
Taking the example above, here’s a comparison of the total repayments for the entire life of the loans: $657,720 vs $554,040 without NHG. That’s more than a $100,000 difference!
Should You Apply for NHG?
If you want to own a brand new home in WA today, NHG can genuinely assist you. Another significant benefit is that you can still apply for other programs that support first homeownership. For example, you may be able to qualify for the First Home Super Saver Scheme (FHSSS) and First Home Owner Grants (FHOG). Be sure that you check the criteria of the mentioned schemes since they have their conditions and requirements for applicants.
To get the benefits of NHG, you should meet the following eligibility criteria:
- You should be an Australian citizen and at least 18 years old.
- If you are single, your taxable income should be no more than $125,000 per annum.
- For couples, your taxable income should not be over $200,000 for the previous financial year.
- You should be prepared to provide a 5% to less than 20%. If you give 20% or more, the NHFIC will not guarantee your home loan.
- You should live in the home you purchase (i.e., as an owner-occupier)
- Your mortgage should apply for a principal and interest (P&I) loan for up to 30 years.
Some exceptions exist, such as interest-only loans, which have conditions specifically for constructing new houses. NHG is not applicable for permanent residents. Also, suppose you’re applying as a couple. In that case, you should be married or in a de facto relationship, not as siblings, parents, or other relatives.
Buying a brand new home is everyone’s dream, whether it’s an established or soon-to-be constructed one. You can make this dream come true with the help of the New Home Guarantee. Start your search with Homeworx. Talk to our experts today!