Do your sums on FHOG

The Boost to the First Home Owners Grant has been extended until 30 September, 2009. After that it reduces by half until 31 December 2009. In the New Year, the grant returns to an ongoing amount of $7000 for both new and established homes for those buyers who are eligible.

However, being eligible for the grant doesn’t necessarily make buying a house achievable. Prior to the announcement of its extension, we were inundated with calls from customers who wanted to take advantage of the government’s generous offer, particularly for the $21,000.00 for the purchase of a new dwelling. While the $21,000 is still up from grabs for those whose construction commences on or before September 30, it might not be enough to get you into a home on its own.

This is largely because lending has changed significantly over the past several months. In the current environment, the great majority of banks will only lend you 90 per cent of the value of the property you are considering for purchase. This means you have to come up with the other 10 per cent yourself. In some circumstances you can still borrow 95 per cent but even 5 per of an average property is still a lot of money.

The other stumbling block is the fees. While state governments have come to the rescue on stamp duties (for example: first home buyers are virtually exempt from transfer and mortgage duties on homes under $500,000 in Queensland) there is still the matter of mortgage insurance. To get a loan where the borrowing amount is greater than 80 per cent of the purchase price, you have to get your loan mortgage insured and this comes at a cost - the lower the LVR the cheaper the premium. However, as we’re talking 95 per cent, these premiums are at the upper end and even with the discounts some insurances offer first home buyers, the amount can be several thousand dollars.

The last hurdle you need to overcome is the requirement to provide evidence of genuine savings. This means you have to demonstrate to a bank that the money you are contributing as 5 per cent has been saved over a period of time – usually 6 months.

Table 1. Estimate of Savings Required – Established Home

Costs
Purchase Price $350,000.00
Lenders Mortgage Insurance (approx)* $ 6,949.00
Government Fees (estimate) $ 676.00
Legal/Conveyancing (allow say,) $ 1,000.00
A Total Costs to Purchase $358,625.00

Funds
Borrowings from Bank @ 95% $332,500.00
First Home Owners Grant $ 14,000.00
B Total Funds Available $346,500.00

A - B = Your contribution (savings) $ 12,125.00


After December this year when the FHOG reduces, this same scenario will be $7,000.00 dearer. Trying to do the same thing with only a 90 per cent loan will be even more difficult. You should note that there are conditions surrounding your circumstances in qualifying for a 95 per cent LVR loan apart from the obvious issues of affordability.
In summary, if you are nearly in a position to buy your first home it might make sense to explore your options sooner rather than later. However, don’t put yourself in a situation where you can't afford your new loan just for the sake of the extended first home owners grant.

* Lenders Mortgage Insurance will vary depending on bank and Mortgage Insurer