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$155,934: Shocking salary you need to afford First Home Guarantee

First home guarantee: An open home sign on a footpath and Australian currency.
New research has revealed the amount Aussies would need to earn under the new price caps for the First Home Guarantee. (Source: Getty)

The Government’s First Home Guarantee allows those looking to enter the property market to do so with just a 5 per cent deposit, but new research reveals the income you would need to afford the loan.

The Federal Government announced it was increasing the available price caps for applicable homes under its First Home Guarantee, but the income needed to afford properties at the higher end are staggering, according to Canstar research.

The analysis looked at the income requirements for a single buyer with a car loan and a dual-income couple with a car loan and two children, and the assumption they took out a 5 per cent deposit on the average variable home loan rate of 2.99 per cent.

For tax purposes, the analysis assumes there’s an even split in earnings between the couple.

NSW requires the largest income to afford at the higher end of the price cap.

For NSW residents living in Sydney or regional centres, house prices are now capped at $900,000, meaning single buyers would need to earn an after-tax income of $149,868 annually while a couple would need to earn $155,934 to qualify.

This was followed by Melbourne and Victorian regional city centres, where prices are now capped at $800,000, meaning buyers would need to earn $135,892 annually as a single and $142,918 for couples.

A chart showing the income required to achieve borrowing power needed for the new first home guarantee scheme.
(Source: Canstar)

“On a positive note, the First Home Guarantee Scheme helps first-time buyers enter the market sooner with a smaller deposit, allowing them to save on lenders mortgage insurance,” Canstar’s editor-at-large and money expert, Effie Zahos, said.

“But that’s not the whole picture.

“The Government may have increased property price caps under the scheme, but this doesn’t necessarily mean borrowers can afford the repayments, especially when you consider the average gross Australian wage is $90,917.”

Higher interest rates will push up mortgage repayments

With wage growth still sluggish, higher interest rates on the cards and property prices predicted to fall, prospective buyers should consider their ability to meet future repayments.

“The first Reserve Bank cash rate increase is expected to happen in June, so prospective buyers should make sure they factor potential rate rises into their budgets, and allow for some extra financial wiggle room ahead of time,” Zahos said.

Canstar’s research showed that if the Reserve Bank cash rate increased in line with Westpac’s latest forecast, the average variable rate would rise from 2.99 per cent to 4.89 per cent by the end of 2023.

For a borrower with a 30-year $900,000 principal and interest loan, Canstar research showed this would see their monthly repayments rise by $957, while a borrower with a $700,000 loan would see their repayments rise by $745.

“With mortgage repayments to increase off the back of rising interest rates, and property price forecasts to see a downturn, the reality is some home owners may find themselves in negative equity, however this only becomes an issue if you have to sell,” Zahos said.

“If you can ride out the market volatility, then in the long run, history tells us investing in property can be a sound decision.”

What to consider before taking on the First Home Guarantee

Zahos shared her top five considerations before applying for the scheme:

  • Enter the market sooner and save on lenders mortgage insurance (LMI). With the Government providing a guarantee of up to 15 per cent of the purchase price, LMI is not needed, meaning buyers can enter the market sooner with a smaller deposit.

  • Avoid owing more than you own. A 5 per cent deposit means first home buyers will need to borrow more than they would with a bigger deposit, therefore their total interest could end up costing them more, especially if interest rates increase.

  • Only borrow what you can truly afford. With interest rates set to rise in the near future, borrowers should factor in some extra room in their budget for higher repayments and to avoid mortgage stress down the track.

  • Just 33 lenders participate in the scheme. This means buyers may potentially miss out on lower interest rates in the market, with listing rates from more than 100 lenders. If applying in the scheme, it’s a good idea to compare the interest rate on the loan, keeping in mind borrowers in the scheme may not be in a position to refinance to a lower-interest-rate loan until they have reached 20 per cent equity to avoid paying LMI.

  • Know your risks. Borrowers should understand that the Government’s First Home Guarantee only covers them for the 15 per cent deposit. If borrowers are in arrears and/or have legal fees, their lender may chase them up for these payments.

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