- First home buyers could pay higher interest rates under a government scheme that would allow them to buy with a deposit of just 5%, as the banks baulk at the mechanics.
- According to the AFR, the big banks have privately floated the idea of charging a risk premium to those who apply via the scheme.
- While helping first home buyers get approval, such a move could render the government assistance more expensive than simply taking out mortgage insurance.
First home buyers can't seem to catch a break.
Under the government's first home buyers scheme, some looked destined to get into the property market with as little as a 5% deposit. Despite the government effectively guaranteeing the mortgage, the major banks want to charge mortgagees interest rates above the rest of the market, according to reporting by the Australian Financial Review.
"Bankers are concerned that home buyers with deposits as little as 5% of a property's value will be riskier than other first-time borrowers who usually are required to have saved a minimum deposit of at least 10%, and sometimes as high as 20%," the AFR wrote.
"Some banks want to be able to charge higher interest rates to low-deposit users of the taxpayer-guaranteed mortgages, to reflect the greater risk of default."
Such a move could see homebuyers get into the market more easily but pay far more over the life of the loan than had they simply stumped up the full deposit in the first place.
Typically a deposit under the 20% mark would require a borrower to take out mortgage insurance, effectively forcing buyers to pay a premium for the additional risk they pose. However, a government guarantee would appear to negate that risk, with the Australian taxpayer essentially agreeing to cover the other 15% of the deposit for them.
Take for the example of a first home buyer buying a $700,000 property – the upper limit in Sydney under the scheme. According to the YourMorgage mortgage insurance calculator, a deposit of 5% would require nearly $30,000 of mortgage insurance to secure a 30-year loan. The government's intention is to eliminate that cost and get the buyer approved.
While the banks have not suggested exactly how much extra interest they would like to charge, it is possible to run a hypothetical. If those same borrowers are required to pay an extra 0.25% interest rate over the life of that same loan for example, the premium paid blows out to around $32,000 – meaning they'd paid more under the scheme than if they had managed to get approved and just paid for mortgage insurance.
"It would appear our bank execs don’t understand the new government's new first home buyer scheme," Canberra mortgage broker Tom Leahey tweeted.
It provides a guarantee, thus removing the risk to the bank – [the] same as a parental guarantee. I don’t know any bank that loads [the interest] rate for a parental guarantee".
It puts the big banks at odds with the government, which has lauded the benefits of its program to tackle housing affordability. It is understood the scheme will only be rolled out via just two of the big four, in an attempt to produce a competitive spirit rarely seen between the country's well-established oligopoly.
However, the effectiveness of the program remains a matter of debate. In a research note released just weeks , CoreLogic head of research Tim Lawless voiced his scepticism.
"The First Home Loan Deposit Scheme, which goes live in January next year is likely to be oversubscribed, however we aren’t expecting this program to make a substantial difference to overall first home buyer participation rates considering the scheme is capped at 10,000 buyers, which equates to less than 10% of first home buyers numbers over the past year," he noted.
Earlier this year, Lawless told Business Insider Australia that while giving the impression the government was doing something, such schemes were band-aid solutions.
"It's addressing the symptoms are getting into the marketplace, not the underlying problems. It's a fix that addresses demand, but not the underlying supply issues in the marketplace, like creating more jobs in areas that are more affordable, that's a bit of a no brainer," he said.
"It would be great to see the government leading the charge, and putting some of their large offices and employment nodes in regional areas for example."
In CoreLogic's 2019 housing affordability report, it also recommended the reduction or removal of stamp duty, improved infrastructure and other structural changes.
The advice has clearly fallen on deaf ears. While 10,000 first home buyers will appreciate the government scheme, it will do little for the other 90,000 wannabe first buyers out there.
If higher interest rates were offered, however, 10,000 buyers might be better off without it anyway.