Kicking off this month, the Victorian government has announced a pilot program for up to 400 Victorians low-middle income earners who are buying their first home, whereby they will contribute up to 25% of the purchase price through the HomesVic initiative. It’s what’s called a shared equity scheme. For full details, FAQ’s and eligibility criteria head straight to the HomesVic website.
There’s been a few initiatives over recent years by state and federal government to address housing affordability including the First Home Saver Accounts and the First Home Super Scheme. The first has been abolished and the second severely limits how much you can save per year, with a cap of $30,000 total.
Back to HomesVic. In exchange for their contribution the government will take interest in your home, up to 25% of the value and do so interest free. Sounds great right? You only have to save a 5% deposit (though it has to be genuine savings – no gifts, bonuses or inheritances) and can get into your home a little faster.
Well, we would caution you to do your research before jumping in feet first. A few things we noted upon review of the initiative:
- Whilst it’s great to be able to get into your home a bit quicker, you will be limited in who you can borrow money from (and their corresponding terms and conditions, products and interest rates).
- The government are giving priority to certain applicants based on the location they want to buy in, so you may be eligible to qualify but not make the final cut if someone else is buying in a preferred area (think developing outer suburbs, not Richmond or Elsternwick).
- You aren’t able to sell the dwelling for at least 2 years, which may be quite restrictive depending on your circumstances.
- Finally, whilst you can refinance (to another of their approved lenders), you won’t be allowed to increase any of your borrowings. This means you aren’t able to increase your loan to put down a deposit on another property, nor are you allowed to rent out the property you purchase via HomesVic as an investment – you must live in the dwelling.
In our eyes the biggest thing you need to consider is this: you have to repay the government’s proportional interest back to them – this doesn’t mean the amount they contributed in the first place, it means you have to pay them the % value they own of your property.
Let’s do some numbers on this.
If you buy a house worth $500,000, and the Vic government chips in 20% then they’ve contributed $100,000 to your purchase. If in a few years when you go to sell, and your house has increased in value, then you still have to pay back 20%. So, if your house has increased in value and is worth $800,000 then it’s not $100,000 you have to fork out, it’s $160,000. And with dwelling values in Melbourne in particular increasing at a rate of 8% YoY (Source: CoreLogic Home Value Index) then you will find your debt to the government is increasing at the same rate.
When it comes to buying property, we believe in buying well and setting yourself up. This doesn’t mean you should be in a rush to do it. The more interested parties there are to your home and financial situation, the more complicated and restrictive it becomes.
Make sure you contact us to explore all options before giving away up to 25% of your equity. Lenders Mortgage Insurance (LMI) may not be so bad compared to 20% of your equity that in years to come could cost you $100,000’s.
Image source: Invest2Day