The Coalition Government has promised to make housing more affordable by lowering deposits for first time buyers. Housing affordability is an ongoing issue in Australia particularly for younger people trying to get a foot on the property ladder. To help remedy this the Collation Government announced a First Home Loan Deposit Scheme. Under the new scheme eligible first time buyers will only need a 5% deposit for a mortgage rather than the usual 20% with the government making up the shortfall. But what will this slash to mortgage deposits actually mean for first time home buyers and how will this affect the housing market?
The government has committed 500 million to the fund the scheme and it will it be administered by the National Housing Finance and Investment Corporation starting from January 1st.
Along with decreasing deposits, the scheme will also exclude people from paying costly lenders mortgage insurance. This is normally required by lenders on deposits under 20%. It protects them if home owners can’t afford to meet their repayments and can cost around $10,000 or more.
Who is eligible?
The loan is available to single first time buyers earning up to $125,000 a year or couples earning up to $200,000 a year.
The government have said that the new loan will be capped at 10,000 people a year and will be on a first come first serve basis. This is a small percentage of first time buyers considering more than 110,000 Australians bought their first home in 2018.
However this seeming fix to home ownership and affordability may actually leave first time home owners paying more in the long term.
Research by Ratecity found that currently a $500,000 mortgage with a 20% deposit would mean monthly repayments of $1,982 a month over 30 years. Whereas a 5% deposit would see monthly repayments increase to $2353 a month over 30 years and paying an extra $58,774 overall.
The research did find that the scheme would sustainably decrease the amount of time it would take for people to save for a deposit. Based on average house prices would-be home owners in Melbourne who save $400 a week would be able to afford the 5% deposit over 4 years earlier than saving for the 20% deposit.
However RateCity research director Sally Tindall warned first time buyers to be cautious as they will be ‘signing up to a 30-year mortgage with a wafer-thin deposit.’
She said that starting with such a small deposit will see people making higher monthly repayments and shelling out thousands more in interest to the bank over the life of the loan.
“Don’t rely on the government to tell how much you can borrow. Do the maths yourself, taking into account things like extra interest versus not having to pay rent or lenders mortgage insurance, and work out whether a 5% deposit is a good idea for your financial future. You may find you’re worse off in the long run,” she said.
What will this do to house prices?
Housing prices have been steeply falling in Australia and this scheme could see a turnaround for the housing market with more demand driving up house prices. Prime Minister Scott Morrison said that the policy would have a "firming" effect on falling house prices.
However Brendan Coates and John Daley of Grattan Institute warned in an online article for The Conversation that the scheme will have little effect on increasing home ownership for the masses. The 10,000 person a year cap is around one in every ten mortgage loans which they estimate would make home ownership ‘only 1 per cent higher in a decade's time.’
They also warned that it will be counterproductive to housing affordably if the 10,000 person cap is lifted, which has been suggested by the Coalition Government.
“If it "succeeded" in rapidly expanding demand from first home buyers, it would push up prices for everyone, not least all the other first home buyers trying to get into the market,” said Brendan.
Whether good or bad in the long term the news will be welcome to property developers who rely on first home buyers to purchase their new development.
Sophie Thomas works in our Business Support group and has a very strong career background in marketing for business' and customer service. She has very well developed negotiation skills which assist our client's in getting favourable outcomes from other stakeholders. Sophie has previous experience working in local government in her native home in the UK and has a very well developed understanding of the inner workings of local councils.