What is the help-to-buy scheme and how does it work?

A list of criteria to see if you are eligible for the help-to-buy scheme

What is the help-to-buy scheme and how does it work?

If you want to enter the housing market but do not have enough money to make a standard deposit, you may want to take a closer look at the Australian government’s help-to-buy scheme. Here is what it is, how it works, and who is eligible.

Understanding Australia’s help-to-buy scheme

The help-to-buy scheme is a shared equity scheme that allows Australians to buy a home, with the government contributing as much as 40% of the total cost for a new house and up to 30% on an existing house. If you want to participate in the help-to-buy scheme, you only need to contribute a 2% deposit and are exempt from paying Lenders Mortgage Insurance. You do not have to pay rent on the portion of the property owned by the government, and you can also buy out the government’s share, if and when you are able.

The help-to-buy scheme was introduced by the Australian Labour Party and was designed to help Australians navigate the longstanding housing affordability crisis. Every year, there are 10,000 places open to eligible Australians.

How does the help-to-buy scheme work?

Australia’s help-to-buy scheme lets homebuyers get into the market using smaller deposits than normal. The help-to-buy scheme also allows homebuyers to avoid lenders mortgage insurance premiums as well as high borrowing costs typically strapped to most buyers who pay low deposits.

In the help-to-buy scheme, the Australian government pays for a portion of your costs so that you do not have to borrow an astronomical amount. This allows you to avoid LMI since the money that the government fronts effectively boosts the size of your deposit—which ultimately ends up saving you a lot.

A breakdown of how the help-to-buy scheme works is illustrated in the following hypotheticals. In this first scenario, you purchase a property for $600,000 with a low deposit, 5% (or $30,000), and no support from the government. You borrow the remaining $570,000 and get a 30-year home loan with an interest rate of 3%, with monthly loan repayments of $2,403. Your lender also charges you an LMI premium of $22,788.

In the second scenario, you enter the help-to-buy scheme and purchase a property for the same amount, $600,000, and the same deposit, 5% (or $30,000). In this second scenario, however, the Australian government contributes 15%, or $90,000, leaving you to borrow the remaining $480,000. You get a 30-year home loan with an interest rate of 3% and your monthly loan repayments are $2,023. Additionally, you do not have to pay anything in LMI premiums.

Who is eligible to avail of the help-to-buy scheme?

The eligibility requirements to enter into Australia’s help-to-buy scheme can be broken down as follows:

Income. Your individual gross income must not be more than $90,000 per year and, if you are a part of a couple applying jointly, your gross income must not be more than $120,000 per year. If your income is more than the maximum number allowed for two consecutive years, you would have to repay the government’s portion either in part or in its entirety, depending on the circumstances.

Property ownership and residency. You can’t have land or property under your name either in Australia or overseas and the property bought through the help-to-buy scheme has to be your primary residence.

Age and citizenship. You must be an Australian citizen and at least 18 years of age, and if you are a permanent resident, you are ineligible.

Deposit and other expenses. You must pay a minimum deposit of 2% as well as legal costs, conveyancing fees, stamp duty, and any related expenses or taxes.

Type of housing. You can buy a new home or an existing home that is a stand-alone house, a semi-detached house, a duplex, a townhouse, or a unit.

Other requirements. You must pass the serviceability test of the lender and qualify for a home loan.

How to apply for the help-to-buy scheme

The Australian government has yet to announce when the help-to-buy scheme will start. The government has revealed, however, that from July of 2022 it will start making changes to its foreign investment screening fees and financial penalties in order to pay for the help-to-buy scheme.

In the meantime, there are other government programs available to you, including the first home guarantee, if you are shopping for your first home. Additionally, you can apply for the guarantor home loan, which will help you borrow up to 105% of the value of the security.