The Coalition government’s First Home Loan Deposit Scheme came into effect on 1 January, allowing first home buyers (FHB) to purchase a home with a deposit as small as 5 per cent.
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Intended to help struggling buyers, the 10,000 loans available also don’t require the purchase of costly lenders mortgage insurance (LMI). There are 27 lenders signed up.
Announcing the scheme last year, the Coalition government said the scheme would support “low and middle income earners” and would be a “game changer for first home buyers” as it would cut the waiting time to save for a deposit.
But will it work?
According to CoreLogic’s head of residential research for Australia, Eliza Owen, the scheme may be useful to those who can access it. For everyone else, it does little to achieve housing affordability.
In a blog, Owen noted that the income limit for the scheme - $125,000 per annum for a single or $200,000 for a couple is “strangely high”, with those earning that amount in the top 20 per cent of full time workers in Australia.
“The scheme may actually provide more advantage to those earning towards the top of the threshold. That is because they can save a 5 per cent deposit more quickly, and the scheme is currently limited to 10,000 guarantees a year, awarded on a ‘first in, first served’ basis,” she said.
With an income of $125,000, it will take 18 months to save a 5 per cent deposit on a median-value home ($540,974), based on a savings rate of 20 per cent of after-tax income.
Someone earning $78,000 will need two years and three months, while someone earning $48,100 will need more than three years.
“In reality, the savings rate is unlikely to be constant across all income levels. With the national household savings rate at 4.8 per cent, it may not be realistic that all hopeful FHBs can save 20 per cent of disposable income, especially if they are also paying rent,” Owen added.
“Ownership rates in the highest gross income quintile of households was over 80 per cent in 2013, compared with about 55 per cent amid the lowest quintile. Improving home ownership in Australia may need more progressive policy.”
Continuing, the head of research said the current scheme risks awarding home ownership to buyers who probably would have achieved it with time regardless.
Will it cost buyers?
According to Domain research released last May, the scheme could also cost buyers an extra $53,000 over the life of the loan as they pay greater interest.
However, renters attempting to save enough for a greater deposit while renting in expensive areas could also end up spending a similar amount on rent alone.
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