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The government's first home buyer loan deposit scheme just kicked off. Here's why it won't help the people who need it.

Jack Derwin
  • The first home loan deposit scheme began on 1 January, but has already been criticised for its flaws.
  • The income thresholds are too high, according to CoreLogic head of residential research Eliza Owens, who says it advantages high-income earners over other Australians.
  • CoreLogic analysis suggests that high earners will be able to muscle their way into the limited 10,000 available places.
  • Visit Business Insider Australia’s homepage for more stories.

It's been up and running for less than a week but already it's obvious there are issues.

The government's first home loan deposit scheme (FHLDS) has been up and running since 1 January. Under the scheme, 10,000 Australians will be able to nab a government-backed home loan with as little as a 5% deposit, and no requirement to pay lenders mortgage insurance (LMI).

On paper, it sounds like an ok deal but under the hood, it's got some major shortcomings according to CoreLogic head of residential research Eliza Owens.

"The consensus is that helping first homebuyers overcome a large deposit hurdle does not address affordability, because it ignores the root causes that make that hurdle so high in the first place," Owens said in a note supplied to Business Insider Australia.

Without dealing with underlying issues of supply, the exorbitant price tags already attached to Sydney and Melbourne property are likely going nowhere but up. It's not the only major issue undermining the scheme.

The scheme's generous thresholds help the rich over the poor

As Business Insider Australia has previously reported, individuals earning up to $125,000 a year and couples earning $200,000 a year are eligible. That's simply too high, according to Owens.

"A wage of $125,000 is in the top 20% of full-time workers. The median pre-tax income for an individual in Australia is about $78,000," she said.

"The scheme may actually provide more advantage to those earning towards the top of the threshold ... because they can save a 5% deposit more quickly, and the scheme is currently limited to 10,000 guarantees each financial year, awarded on a ‘first in, first served’ basis."

Hardly the desired effect considering declining homeownership rates, especially among low-income earners. Between the late 1980s and today, homeownership has just about halved among the bottom 60% of Australians aged 25-34, according to government statistics.

CoreLogic's analysis below shows the time it takes to save a $27,610 deposit – 5% of the median property price in Australia – with three different incomes. It would take 18 months for someone earning $125,000 to save the deposit while a median income earner of $78,000 would take 27 months. Meanwhile, someone earning $48,100 a year would need 39 months to save, meaning high-earners are more able to pip their competitors to the post.

"In reality, the savings rate is unlikely to be constant across all income levels. With the national household savings rate at 4.8%, it may not be realistic that all hopeful FHBs can save 20% of disposable income, especially if they are also paying rent," Owens said. "These savings periods will also be affected by changes in the median dwelling value, which is not taken into account."

Either way, it's unlikely to help boost homeownership rates -- the stated goal of the scheme -- for those who need it most: low-income earners.

"The FHLDS, in its current state, risks awarding homeownership to those who may have otherwise attained it with time," Owens said.

Properties could cost more under the scheme

There's also another problem at play: a smaller deposit means a longer-term mortgage to pay the remaining 95% borrowed down. Consequently, your first home will cost more than if you were able to stump up the full 20%. There are of course advantages to this approach.

"Paying more interest on a low deposit loan also makes sense if property values are going up. By accessing a property sooner, the asset has longer to accumulate capital growth that may outweigh the higher level of interest paid," Owens said.

"That higher interest cost could [also] be less than what is spent on rent during the time taken to save."

That won't be the case for all prospective buyers, nor is endless property price growth guaranteed, despite what recent history may suggest.

The scheme's places are relatively limited

Given the other problems, it doesn't really matter – but it is worth pointing out how 10,000 places shape up in terms of the market.

Almost 11,000 new first home buyer loans were taken out in just the month of October last year.

If none of that deters buyers, Sydney house prices still might.

READ MORE: There's just a handful of Sydney suburbs cheap enough to qualify for the government's first home loan scheme

READ MORE: Here's the list of all 27 banks participating in the federal government's first home loan deposit scheme