Whether or not you should buy a home is a question that gets asked a lot in the FIRE community. Here in Australia, particularly if you are part of the 35% of the population that lives in Sydney or Melbourne, it’s a huge amount of money both as an absolute number and as a multiple of your income. As a result of the cost whether you buy one or not can have a huge impact on how much money you can put into the investments that you’ll need to support yourself when you retire.
If you do decide that you want to buy a house though, then from a financial perspective now seems to be a great time to do so given the range of incentives from national and state governments. Given how much of a helping hand is available currently I thought it would be a good idea to talk a little about what actually is on offer and how much it can help.
Quick disclaimer: As is always the case you should not plan your finances around what some random person on the internet says. Everything which is written here is of a general nature at most and is certainly not specific professional advice for you and you should not be relying on it when making decisions. I am not recommending you do buy a house, in the interests of full disclosure though my wife and I do own our own home.
Whilst every endeavour is made to provide accurate information at the time of writing you should be talking to a licensed professional about any specific areas of your finances, taxes etc. Also, it’s going to be really embarrassing if it all goes pear shaped and you have to explain that your finances blew up because you read about something from a random blogger.
I also want to be super clear here that I’m not saying you should go out and buy a home. If you want to do that already and you have the finances for it, hey now seems to be a great time in terms of the incentives on offer. If you’ve never had any interest whatsoever in buying a house, feel free to skip this post! If you’re in between, you might as well have a read!
My thoughts on buying a house
Before I get into the details, it’s probably worth very briefly giving my thoughts on buying a house. As with a lot of things I think it comes down to your priorities and what your finances will support. Everyone’s situation is different, if you want to do it and you are happy to accept whatever tradeoffs are involved then go for it! That’s it! At some stage I may do a more detailed post on the pros and cons and various situation etc, but it is not this day!
If you want a more in depth discussion of the tradeoffs then Dave and Pat did a great job of covering the tradeoffs in this podcast which aligns pretty closely with my thoughts on things.
So what’s actually on offer?
As I said above there are different incentives available from both national and state governments, all with various conditions and deadlines and all the rest of it. I’m not going to go through all of it in detail because it’s way too much, but will try to talk about it at a high level and give some example scenarios.
Commonwealth Government incentives
There are 3 main incentives that I’m aware of, these being Homebuilder, First Home Loan Deposit Scheme, and the First Home Super Saver.
I’m not going to talk much about the last one because a) it’s been around for a while already b) it involves superannuation which can be complex to talk about c) it probably gets a little closer to financial advice than I really want to be and d) if you haven’t already been doing it then you may not be able to get much benefit out of it because some of the other schemes are time limited and may expire before you can get much out of this one.
Here’s an explainer though if you’re interested. The short version is that assuming that you do manage to make use of it, you can probably get another $5k towards your deposit as a single person, so $10k as a couple. Which is nice if you can get it obviously, and although not a game changer by itself goes nicely with all the rest of the incentives.
Homebuilder
Homebuilder was introduced as a result of the Coronavirus and gives new home buyers (or renovaters) $25,000 to build a new home (or renovate an existing one). There are lots of eligibility criteria, crucially you don’t have to be a first home buyer for this one unlike a lot of the other schemes. In short the main criteria are:
- Being a natural person aged 18 or older and an Australian citizen
- Have earnings of less than $125,000 as a single person in the 18/19 financial year or later if you’re single or combined income of less than $200,000 if you’re a couple.
- Enter into a building contract between 4th June 2020 and 31st December 2020 where the property value doesn’t exceed $750,000
- It needs to be a home you’re going to live in, not an investment property
So if you were looking at buying a house and aren’t in roughly the top 10% of income earners as a household, then it’s an easy way to get an additional $25,000 towards building your house. The scheme is scheduled to expire at the end of this calender year but it is probably a decent chance of getting extended.
First Home Lending Deposit Scheme
The FHLDS (public servants really need to take some lessons from investment bankers in coming up with snappy acronyms) was introduced as a vote buying exercise means of helping first home buyers just before the last national election.
Basically if you have more than a 5% deposit but less than a 20% deposit you would normally have to take out lenders mortgage insurance (LMI) which will cost thousands for dollars, or even low tens of thousands depending on the percentages and dollar amounts involved. Instead of having to do that, the federal government will guarantee the loan to the lender so you don’t have to fork out for that LMI. So it can save you a pretty decent whack of money.
There are limits to the number of loans that will be guaranteed and the guarantees are parcelled out to the various banks, so there may be a tradeoff between getting the best rate and getting access to the scheme. You’d have to work out the numbers to see if it’s worthwhile or not, bearing in mind that if you plan on refinancing to another bank then you probably need your LVR to be less than 20% to avoid having to pay LMI on a refinance. Edit: Apparently the quota of 10,000 spots has all been taken up, although perhaps the government will add more spots or some of the reserved loans don’t pan out and become available again.
The criteria for this is much the same as for Homebuilder, but as the name suggests you (and your partner if applicable) need to be a first home buyer. There are also limits to the value of the property you are buying as it’s intended to be for a modest home rather than a McMansion.
In my regional city in Victoria the limit is $600,000 which will get you a quite nice brand new house in a pretty decent area, it seems to be the same amount in Melbourne although that’s obviously a far more expensive place to buy a house. This link will tell you what the threshold is for your postcode.
State and Territory Government incentives
Because I don’t want to turn this into a ridiculously long post with all the various state and territory based incentives on offer I’m just going to stick with what’s on offer with the state I live in which is Victoria. From some very brief googling there appear to be fairly similar schemes in most other states, but obviously you would need to look into this yourself.
The Victorian First Home Owners Grant (FHOG) gives you a grant of $10,000 if you’re in Melbourne or $20,000 if you’re in regional areas towards the cost of building your home. I assume the difference is to encourage more people to move to regional areas, or maybe it costs more to build in regional areas, I don’t know I’m just reporting the rules.
You also get an exemption from stamp duty on purchases up to $600,000 and reduced stamp duty payable on purchases between $600,000 and $750,000. If you’re buying an established home then no cash grant for you, but you do still get the stamp duty exemption or reduction which is nice.
On a $600,000 home, that’s a saving of $31,070 which is a fair chunk of change! Realistically you’re probably not spending that much on a block of land if you’re building, so if you were buying a $300,000 block of land and putting whatever value house on it, you’re saving $11,370.
The criteria for this grant is pretty similar to those for the Commonwealth Government grants, although there’s no income criteria. Basically you (and your partner if you have one) need to be over 18, one of you needs to be an Australian citizen, neither of you have received a first home owners grant previously, and you need to occupy the home as your principal place of residence for at least 12 months. If you’re buying an existing house it needs to have been build in the last 5 years and be the first time being sold as a residential property, or apparently if it’s been renovated so that it qualifies as being new.
Numbers, sweet numbers!
So what does all of this add up to? Some of the figures are flat dollar amounts, others are dependent on the value of the property and/or the loan. I’ve done up a few scenarios based on different purchase costs, and I’ve assumed for the purposes of the FHLDS that the buyer is using a 10% deposit in each case with the value of the LMI that you don’t have to pay is calculated using this website as there isn’t anything for it on https://moneysmart.gov.au/.
The value of the FHSS also depends on a bunch of stuff like your income and what rates you can get elsewhere etc, I’ve just assumed a flat $5,000 per person but it may be more or less generous depending on your personal situation. Lastly I’ve assume that if you’re building then half the cost of the property is the land, and half the cost is the build. This makes a pretty big difference to the stamp duty which would be payable because here at least you would only pay stamp duty on the land and not the property as well, although there are apparently some exceptions with house and land packages.
Building a $600,000 home
Building a house for $600,000 in a regional area you’ll get the most generous stamp duty forgiveness as well as the greatest saving from FHLDS so I’ll start with that scenario. If you’re building in Melbourne then you need to take $10k off the incentives because of the lower FHOG, otherwise all numbers are the same.
As I said above $600k will get you a very nice house in a decent area where I live, and in other regional areas it would get you an even better house and/or a great area. In Melbourne you’re probably building out in the suburbs but I think it is still a realistic scenario.
Basically between the various schemes you get $45k in cash grants (Homebuilder and FHOG) plus another $5k to $10k in extra savings through the FHSS, then about $23k of costs that you don’t have to pay because of the FHLDS and stamp duty concession. So $73k in incentives for a single person and $78k for a couple. That’s pretty attractive, you’re saving over 10% of the cost!
If you’ve been saving for a while and don’t need the FHLDS, and didn’t trust the government not to change it’s mind on the FHSS, then you’re not eligible for $17k of that as a single or $22k as a couple, but even so that leaves you with about $56k of incentives which is about 9% of the purchase price.
Building a $450,000 home
Next up I’ll look at building a new $450,000 home in a regional area. The lower stamp duty and lower amount of LMI that you’ve had to pay are the only changes here. I’m not going to bother doing this for Melbourne because I’m pretty doubtful that it is actually realistic, although I guess if you build a small flat on a small block of land then it might work. The only change to the numbers would be taking $10k off the FHOG.
In this scenario as a single person you’re getting close to $65k in incentives, as a couple it’s $70k. That’s just under and just over 15% of the purchase price respectively, so a pretty big helping hand!
Even if FHSS and FHLDS aren’t applicable to your situation it’s still about $52k worth of incentives so over 10% of the purchase price.
Buying a $600,000 existing house
The incentives on this scenario change a lot depending on whether the house was built within the last 5 years and if so whether it’s in Melbourne or regional Victoria. In the best case scenario of the house being built in a regional area within the last 5 years then you get $20k from the FHOG. If it’s in Melbourne then $10k. And if it was built more than 5 years ago, then no FHOG for you! Also the limits on the FHLDS apply, so if you’re in some regional cities you don’t have to worry about LMI, if you’re not then you’re on the hook for it.
Using the most optimistic scenario then you might get $68k as a single person or $73k as a couple. Under the least generous scenario though where you haven’t used the FHSS, aren’t eligible for FHLDS, and no FHOG then you only get the stamp duty concession of $31k. So there can be some pretty big swings depending on what applies and what doesn’t.
Buying a $450,000 existing house
I would guess that there are going to be some houses available in Melbourne for this amount, and almost definitely some flats or apartments. In a regional area it can get you a pretty decent house, particularly outside of the bigger regional cities.
As with the buying a $600,000 existing home scenario, there are some pretty big changes in the value of the various incentives depending on what you’re eligible for. In the best case scenario, you can get $51k as a single and $56k as a couple towards your new home, which is over 10% of the purchase price. In the worst case where the only thing you’re eligible for is stamp duty forgiveness, you save forking out $19k. Which isn’t nothing, but is a lot less than the maximum.
Non government incentives
Various land developers and builders also sometimes have deals if you work in certain industries. Villawood for example have a deal for care workers that can save them $20k on the purchase of a block of land (I live in a Villawood estate which is the only reason I know about this particular one). I’m pretty sure I’ve seen advertising for other developers for savings as well, and some builders although none spring to mind immediately.
Free money yo!
So all up with the various government grants you might get as much as $78k as a couple or as low as $19k depending on your particular circumstances. In percentage terms you might be able to get up to 13% in incentives, which is a pretty good discount compared to those who don’t get the helping hand for whatever reason.
Again, just to be clear I am not in any way recommending that people should go out and buy a house purely because of these incentives. But if you were already planning on doing so or considering it, then there seem to be a lot more government programs to help than are usually available.
Are you looking at buying a house and making use of the current incentives to do so? If you liked this post and would like to read more like it then please subscribe!
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