Yahoo Finance Budget 2022 warning: 5% home deposit scheme has ‘pretty serious risks’
Homeowners could end up in negative equity and owing the bank more than the property is worth if they buy with a 5 per cent deposit, experts have warned.
Taking up the Federal Government's expanded home guarantee scheme - which allows first-time home buyers to purchase a property with only a 5 per cent deposit - comes with “some pretty serious risks”, according to RateCity research director Sally Tindall.
Tindall warned homebuyers risked sliding into the red with predictions of rising interest rates and falling house prices in major cities.
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“Property prices and new mortgage sizes are both at record highs, while risky lending, where people are taking on debts that are six times - or more - their annual income, continues to rise,” she said.
“The regulators are sending out warnings while the politicians are telling people to jump in.”
The Federal Government announced the expansion of the home guarantee scheme on Monday ahead of the release of the 2022 Budget today.
The scheme has been expanded to include an extra 25,000 spots for first home buyers.
Tindall said the scheme had helped thousands of Australians get on the property ladder and capitalise on rising property prices, however, “the outlook for the next couple of years is very different”.
“Property prices are forecast to fall significantly in both Sydney and Melbourne over the next two years, so anyone buying with a 5 per cent deposit now, could find themselves owing the bank more than their property is worth by the end of 2024,” Tindall said.
She said borrowers without a decent buffer “might not be able to make their monthly repayments and risk losing their home”.
New research from Canstar showed rising costs of living were also putting pressure on mortgage borrowers, with many on the brink of financial stress.
Around 14 per cent of mortgage holders were already stretched to their limits and another 19 per cent said a weekly increase in living costs of up to $100 would push them into financial stress.
The ramifications of larger loans
Based on Westpac’s cash rate and property price forecasts through to the end of 2024, RateCity’s analysis showed if someone bought a $800,000 home in Sydney at the end of this year, using the Government's scheme they could potentially find their equity - which started at 5 per cent - drop to -6 per cent by the end of 2024.
This person would face a $539 rise in monthly repayments by the end of 2024, based on the major bank’s estimates of rising interest rates.
Tindall said purchasing a property with a small deposit did help people buy sooner, but taking out a larger loan came with additional risks that needed to be weighed up.
“Buying with a 5 per cent deposit means a person’s loan size is significantly larger than if they had bought with a 20 per cent deposit,” she said.
“This means when interest rates rise, their repayments will go up by more. If property prices then drop, people using this scheme are also likely to be locked into their lender and their guarantor for longer.”
To be on the safe side, she said buyers should make sure they could afford mortgage repayments even if rates rose by 3 per cent.
RateCity’s pros and cons of the Federal Government’s Home Guarantee Scheme
Potential pros:
Avoid lenders mortgage insurance
Get into your home sooner
Stop paying rent
Property prices could rise after you purchase your property
Potential cons:
Property price drops could potentially leave you in negative equity
Higher monthly repayments
Pay extra interest over the life of the loan
Some lenders charge higher interest rates for people with small deposits
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