First-home buyer debt soars by up to $120k under guarantee scheme

First-home buyers have signed up for much bigger loans since the expansion of the government’s First Home Guarantee Scheme.

First-home buyer debt levels have exploded since Labor’s signature housing policy was expanded last month, with experts warning of growing risks for the property market.

Alarming new figures from mortgage aggregator Loan Market Group revealed first-home buyers signed up for an average of nearly $120,000 more debt in some areas last month.

This coincided with the October expansion of the First Home Guarantee Scheme.

The scheme helps eligible first-home buyers scale the property ladder with deposits as low as 5 per cent – without needing to pay pricey lender’s mortgage insurance.

It comes as the Australian Prudential Regulation Authority announced on Thursday that it will limit high debt-to-income home lending to contain a build-up of risky mortgage loans.

From February, only 20 per cent of banks’ new mortgages will be allowed at a debt of six times income or more. This will effectively limit how much banks can lend through the scheme.

APRA noted that it had observed a pick-up in riskier forms of lending in the housing market over recent months. Part of that pick-up in riskier lending was driven by first home buyers taking advantage of the government’s 5 per cent deposit scheme.

MORE: Hidden $244k cost of using Albo home scheme

Expansion of the scheme was a pledge in Prime Minister Anthony Albanese’s federal election campaign earlier this year. Picture: Hilary Wardhaugh

MORE: Aussie landlord’s horror after 12 homes stolen

First-home buyers across the country borrowed an average of nearly $60,000 more over the first month of the expanded scheme, a rise of about 10 per cent, according to Loan Market Group data.

Applications for first-home buyer loans also shot up nearly 40 per cent month on month.

The rise in average mortgage sizes was notably higher in NSW and South Australia when comparing loan activity from the September quarter, directly before the scheme expansion.

First-home buyers in NSW borrowed an average of $750,250 over October, compared to $630,200 during the three months to September, a rise of 19 per cent, or about $120,000.

South Australian first-home buyers borrowed an average of $662,625, $105,000 more than before the scheme was expanded.

Rises in average first home loan sizes across Queensland and Victoria were lower at $57,000 (9.4 per cent) and $42,000 (7.3 per cent), respectively.

Loan Market broker Jacob Decru said the increase in borrowing activity was driven by the raising of price caps for the scheme, while income caps were scrapped altogether.

MORE: Suburbs residents are fleeing in droves

Loan Market mortgage broker Jacob Decru said buyers were fast tracking their route to home ownership, even if it meant taking on more debt.

“First-home buyers using the scheme are likely prioritising avoiding LMI and fast tracking their path to ownership, even if it means taking on higher loans,” Mr Decru said.

Lender’s mortgage insurance on a $750,000 loan, if using a 5 per cent deposit, would usually be about $41,000, online calculators showed.

APRA said riskier home loans could threaten the financial resilience of banks if there was an economic recession.

APRA chair John Lonsdale said the authority was concerned about “high household indebtedness”, although he noted a lot of the recent high debt to income loans were to investors.

“Rising indebtedness has in the past often been associated with an increase in riskier lending and rapid growth in property prices,” he said.

PropTrack economist Eleanor Creagh noted that increased first-home buyer demand was coinciding with a lacklustre listings environment: housing supply had failed to match the increase in demand.

NSW Tenants Union boss Leo Patterson Ross said the scheme was incentivising first-home buyers to take on more debt.

He said this would make it harder for future renters to become first-home buyers as prices would rise dramatically.

The average NSW first-home buyer borrowed $750,000 in October, the first month of the expanded scheme.

Mortgage Choice Dee Why broker James Algar said many of the buyers accessing the expanded scheme were fast tracking plans to get into the market to avoid getting priced out down the track.

“There’s a feeling that they will get left behind if they wait too long,” Mr Algar said.

“They’re often willing to take on the higher debt because they believe they will have to get into even more debt if they wait two or three more years for a bigger deposit.”

Finder home loans expert Richard Whitten said the expanded scheme, coupled with interest rate cuts, had the potential to create real “upwards pressure on prices”.

A Minister for Housing, Homelessness and Cities spokesman said the scheme had helped 200,000 Australians buy their homes sooner, while saving on lender’s mortgage insurance.

“It remains an incredibly robust program – of the more than 170,000 guarantees issued, less than 0.01 per cent have been paid out,” the spokesman said.