Domain chief of research and economics Dr Nicola Powell expects this week’s expansion will ‘supercharge’ sub sections of the market. (Source: Domain/Newswire)
The expanded Home Guarantee Scheme will kick in this week, allowing first homebuyers to purchase a property with just a 5 per cent deposit. While the scheme will allow buyers to get on the property ladder quicker, major warnings have been issued over the impact on property prices and the risks for individual buyers.
From October 1, first home buyers will be able to use the scheme to buy a home with a 5 per cent deposit without needing to pay lenders’ mortgage insurance. Previous income and place caps will be removed, and property price caps will be raised.
Domain chief of research and economics Dr Nicola Powell told Yahoo Finance she expected the expanded scheme would “supercharge” certain sub-sectors of the market.
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“This is like giving a whole lot of first-home buyers a credit card, bringing them to market much sooner, and we’re not complementing it with higher levels of supply,” she said.
“So we are going to see property prices supported. We’re going to see more first-home buyer activity, which means we’re going to see more activity at the lower end of the housing market.”
Treasury estimates the scheme would have a minor impact on home prices of about 0.5 per cent over six years.
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However, a Lateral Economics report prepared for the Insurance Council of Australia suggested national prices could potentially increase by between 3.5 and 6.6 per cent in the first year.
SQM Research has also warned the scheme could lead to a more than 15 per cent increase over six years.
Powell said the “winners” of the scheme would be the first wave of first-home buyers who take up the scheme, along with those who already own property.
“The next waves of first home buyers are going to be just paying more because property prices are going to rise,” she said.
From October 1, there will be unlimited places in the scheme.
Previously, the scheme was open to up to 50,000 home buyers, including 35,000 first home buyers, 10,000 regional home buyers and 5,000 single parent home buyers.
Income caps will be removed. Previously, the first home guarantee was limited to singles earning $125,000 or less, and couples earning $200,000 or less.
Higher property price caps will also apply. For example, the Sydney cap will increase from $900,000 to $1.5 million, Melbourne will go from $800,000 to $950,000, and Brisbane will go from $700,000 to $1 million.
Buyers who have a deposit of less than 20 per cent typically have to pay LMI, unless they have a waiver or guarantor.
Canstar analysis found that someone with a 5 per cent deposit would typically have to pay $27,765 in LMI for an average $695,440 unit.
For the average $920,003 house, they would typically pay $36,730 in LMI costs.
While the scheme will lower the deposit required and allow you to avoid LMI costs, the trade-off is extra interest costs.
That’s because buyers will be taking out extra debt, which means they will pay extra interest compared to a traditional 20 per cent deposit.
Cotality head of research Eliza Owen calculated that for an average $848,858 property, a borrower would pay $132,936 in additional interest with a 5 per cent deposit compared to a 20 per cent deposit.
“Over the life of a 30 year loan, the extra interest costs can be tens-of-thousands, or hundreds-of-thousands more expensive than a 20 per cent deposit home loan,” she said.
Even though a smaller deposit means paying more interest over time, Owen found it could still work out cheaper for renters.
“Getting into a home sooner may mean spending less time paying rent, and those savings can add up,” she said.
“The biggest savings across the capital cities are estimated to be in Sydney, where a 5 per cent deposit reduces time to save a deposit by an estimated six years, and $251,000 on rent at $801 per week.”
For a $1.5 million Sydney home, a buyer would need $75,000 for a 5 per cent deposit, compared to $300,000 for a 20 per cent deposit.
Cotality compared how the numbers stacked up on a 5 per cent deposit for renters, based on Lendi’s LMI calculator. (Source: Cotality)
Owen calculated you would pay $234,909 in extra interest on the life of the loan with the 5 per cent deposit.
However, when you add the rental savings, plus the LMI savings, you could save between $72,252 and $96,252.
Owen noted this analysis had a lot of assumptions, including being based on a 30-year loan with a 5.5 per cent interest rate.
“For example, someone who does not have rental costs might find it more beneficial to save up a full 20 per cent deposit, saving on both LMI and extra interest costs,” she said.
“But there are other considerations to take into account even for non-renters, such as entering the market sooner to get ahead of further potential market upswings.”
While the expanded scheme will open the door for thousands more Aussies to get into the property market sooner, Canstar data insights director Sally Tindall said it was important to understand the risks and responsibilities involved.
“This scheme takes lenders’ mortgage insurance off the table, which can be a roadblock for many first home buyers. However, that doesn’t make a wafer-thin deposit risk-free,” she said.
“A smaller deposit typically means a bigger loan, higher monthly repayments and potentially a higher interest rate. The good news is there are now 38 lenders in the scheme, which provides buyers with a choice of rates.”
Borrowers will also need to pass banks’ serviceability tests to make sure they aren’t taking on debt they can’t afford.
Borrowers will also need to be aware that they can’t move out of the property and turn it into an investment while the guarantee is in place.
They are also unlikely to refinance until they have 20 per cent equity in the property, and there is a risk they could fall into negative equity if property prices did drop.
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