First Home Loan Deposit Scheme, will it really help you?

First Home Loan Deposit Scheme, will it really help you?

  • On Monday the government released the details of a $500 million scheme to help first home buyers purchase a home sooner. 
  • With wage growth remaining stagnant, could this be the housing affordability lifeline that is desperately needed?
  • The government has indicated that there is scope for the scheme to expand if there is demand for more loans.
  • Read on for a mathematical analysis of the program.

The details of the First Home Loan Deposit Scheme

Basically, the new scheme will allow first home buyers to secure a loan without having to pay Lenders Mortgage Insurance with only a 5% deposit instead of the 20% they require now. The other (up to) 15% will be guaranteed by the National Housing Finance Investment Corporation, which the government will increase funding to.

The government guarantee will stay in place for the life of the loan: until it is paid off, refinanced, or the loan defaults.

The scheme will be available to first home buyers fitting into these two categories:

  • Individuals with an income up to $125,000 p.a.
  • Couples with a combined income of up to $200,000 p.a. (both must be first time buyers)

Restrictions will apparently be put into place to ensure that the borrowers maintain the owner-occupier status of the properties purchased.

The scheme will be capped at 10,000 loans per year and will have a limit on the value of properties eligible for the scheme.

Currently, around 100,000 first home buyers take out home loans each year, meaning that ninety per cent of people will miss out due to the first come, first serve nature of the scheme. 

Prime Minister Scott Morrison (ScoMo) has noted that owners refinance property once equity has increased, something he believes will happen under a Liberal-National government. 

This would appear to be laughable at best, considering house prices have already started sliding (dare I say, crash) and are expected to continue decreasing in value.

Graph showing change in Australia house values from peak to March 2019
CoreLogic and ABS

Labor has promised to match the plan, although they believe the scheme is just a ploy, as the government has had years to act on the affordability of housing but only seem to care now the election is around the corner (their words, not mine).

Labor, if elected, promises to abolish negative gearing and alter the capital gains tax on existing homes to prevent new investors in existing homes from writing off losses against the tax they pay on their wages. Investors would pay tax on 75 per cent of gains, up from the current rate of 50% in order to rebalance the market.

Their plan aims to boost “genuine” home ownership by owner-occupiers.

Treasurer Josh Frydenberg defended the government’s scheme, saying that the Coalition had consulted people in the property industry, insisting the aim of the scheme was to lift the number of first home buyers in the 25-34 age bracket getting a home loan.  

No matter which political party you support, experts have already prophesized that the policy will fail to meet its objectives.

Questions are being asked of the policy as with wage growth remaining stagnant, house prices are finally correcting in the eyes of the everyday Aussie, and there is a strong argument that government intervention isn’t needed. 

This is backed up by the ABS reporting on Monday that the proportion of loans being taken out by first home buyers was the highest it had been in six years, with more than 8400 in March alone - surely not a coincidence.

Personally, I think the scheme is contradictory. The government claims to want housing to be more affordable and accessible for first home buyers, but insist house prices will increase under their leadership. The scheme aims to fix housing affordability issues by adding demand for housing while doing nothing to alter the supply, anyone who has studied basic economics will know this doesn’t work. 

On top of this, the Australian Prudential Regulation Authority has spent the last four years telling banks to be cautious in their lending to Aussies with low deposits. Now the major political parties are encouraging it. 

A quick mathematical analysis on the scheme shows that it is totally short-sighted in nature. Picture this scenario: You want to purchase a home for $500,000 (conservative price, I know - but it’s just to paint a picture). 

Currently, you need a $100,000 deposit to avoid paying Lenders Mortgage Insurance. If you can secure a loan for the other $400,000 for 25 years with an interest rate of 3.8% and no monthly fees (again, just for example's sake - I know rates move a lot over 25 years) you would be looking at monthly repayments of $2,067, which equates to a total of $620,228 over the tenure of the loan. With the $100,000 deposit, the total cost of the home would be $720,228.

After the scheme is introduced, you can theoretically secure a loan of $475,000 with a 5% deposit of $25,000. With an equal interest rate of 3.8%, you are facing monthly repayments of $2,455, or $736,521 in total repayments. With the $25,000 deposit, the total cost of the home would be $761,521. 

This equates to an extra $116,293 in total loan repayments, which is really $41,293 after allowing for the $75,000 difference in deposit values. 

Even if you save the estimated $10,000 in Lenders Mortgage Insurance, you are still $31,293 worse off. Ouch. 

House and money bags balancing on a scale

I foresee the plan leading to first home buyers taking out a loan larger than they can afford, leaving the government on the hook if the loan defaults.

ScoMo has promised there is “no free money” and explained that risk assessments would still be the responsibility of the banks delivering the loans. 

This is the part of the scheme that worries me the most. While in theory, the politicians get to support the needs of everyday Aussies and earn public trust, the banks still need to approve loan applications based on tight lending controls, imposed on them by the very same people who put this scheme together. 

I think that a lot of young people will believe the scheme to be a great initiative and apply for a mortgage, only to be declined by the banks - affecting both their wellbeing and their credit score. As a young millennial, I fit in the demographic the scheme is aimed at but I wouldn’t even consider applying for a loan without a deposit of at least 10% and rigorous savings plans to prove my capacity to meet repayments, and even then I’m not sure I’m ready to jump into a 25-30 year financial commitment any earlier.

In saying that, the policy is most likely to provide benefit to those who were close to reaching a 20% deposit as those who struggle to save money will fall short of bank eligibility criteria. 

If you think this scheme will open an opportunity for you to get on the property ladder sooner please take your time, do your research and check your credit score for free. If your score isn’t as high as you’d hoped, read our tips to build it