Extended Home Guarantee Scheme has pros and cons for first-time homebuyers

The government plans to expand the Home Guarantee Scheme, which allows first-time home buyers to buy with as little as 5% down payment. But what could this mean for future owners?

In the budget, the government announced that it would increase the number of places for the program to 35,000 per year, from 10,000 previously.

It also continued a low-deposit homebuyer scheme for single parents with up to 5,000 places a year and announced an additional regional homebuyer scheme, similar to a policy previously announced by the Labor Party. , with 10,000 seats.

In the latest announcement from the Prime Minister and Housing Minister, the government pledged to raise price caps for properties eligible for the schemes.

Most capital cities have seen an increase in the cap of $100,000, while the ACT and many regional areas have had their caps increased by $150,000, in an effort to keep up with house prices which have soared in boom over the past 18 months.

House price caps

Source: Australian Government

REA Group’s executive director of economic research, Cameron Kusher, said the increased caps were still lower than typical property prices for Sydney, Melbourne, Hobart and Canberra.

“While the increased caps mean potential buyers can buy more homes than they could have under the old caps, they will in most cases continue to target units rather than houses,” he said. told ABC News.

“This will likely be the case in Sydney, Melbourne, Hobart and the ACT where the median home value remains above the new 2022-23 caps.

“Although it should be noted that the increase in caps is significant and means that in each of these cities there will be more homes eligible for purchase under this program than there were. previously.

“It’s a different story for other cities, given that the new caps are higher than the current median value of homes in those areas. This indicates that more than half of the homes in those cities are now eligible for this program, as well as many units.”

Earlier research by CoreLogic’s Eliza Owen showed that at the end of March, the old caps only allowed buyers to choose from around 35% of established homes nationwide, and as few as 11% in ACT.

However, RateCity research director Sally Tindall described raising the thresholds as a “band-aid solution”.

“Raising house price ceilings could give first-time home buyers more choice in terms of homes to buy, but it will also encourage some to take on more debt, at a time when debt is on the becoming much more expensive,” she warned.

Kusher added that the expanded program could also put upward pressure on the bottom of the housing market for any homes priced below the new caps.

“However, any inflationary pressure is likely to be offset by broader pressures that may contribute to moderate price declines.”

Save on rent, pay more interest

In her research from late March, Ms Owen noted that middle-income first-time home buyers could cut the time they needed to save for a deposit on a typical Australian home price from 8.8 to 2.3. years, while avoiding mortgages from lenders. insurance (LMI).

“This could reduce the rental market by 6.5 years, which at current weekly values ​​of median housing rents in Australia equates to nearly $160,000,” she wrote.

However, while buyers may save “dead money” on rent, they will end up paying more “dead money” in interest to the bank because they will take out a larger loan.

“Taking the median home value and the current average mortgage rate for homeowner borrowers (2.44%), the difference in interest charges between a 5% deposit and a 20% deposit is approximately $37,000 over the life of the loan,” Ms. Owen calculated.

“With the cash rate likely to rise over the next 12 months, this will exacerbate interest [costs] between those with a 5% and 20% deposit loan”.

In other words, the higher the interest rates, the more difficult the mortgage will be.

RateCity calculated the effect that rising rates could have using forecasts from Westpac, which are fairly intermediate among major financial institutions.

For someone who bought an $800,000 home in Sydney or Melbourne with just a 5% down payment, the projected rate hike by 2024 would see their monthly repayments soar by $539.

In cities where the program is capped at lower levels of $600,000 to $700,000, the increase in monthly repayments would be $404 and $471 per month, respectively.

Negative equity risk

These buyers would potentially face a challenge not only from rising interest rates, but also from the risk of negative equity, should Westpac’s home price forecasts turn out to be accurate.

“Encouraging people to buy at inflated prices with next to no protection against rising interest rates carries some pretty serious risks,” noted RateCity research director Sally Tindall.

“Property prices are set to fall significantly in Sydney and Melbourne over the next couple of years, so anyone buying with a 5% down payment now could find themselves owing the bank more than their property is worth. by the end of 2024.

Any buyer unable to keep pace with higher repayments as rates rise could end up with negative equity and risk personal bankruptcy.

Using Westpac’s house price forecasts, the buyer of an $800,000 home in Sydney or Melbourne could end up owing the bank at least $50,000 more than the value of their home. by the end of 2024.

Cameron Kusher said anyone considering signing up for the small deposit purchase program should think carefully about these risks.

“Anyone considering adopting this program should be aware that we are emerging from a period of very strong price increases driven by historically low interest rates,” he said.

“While the program helps buyers gain access to home ownership faster, they should also be aware of the broader conditions under which the cost of servicing a mortgage will rise and prices potentially fall.”

Eliza Owen argues that first-time home buyers probably shouldn’t worry too much about the risk of owing the bank more than their property is worth, with the risk of losing their job and not finding another currently historically. low.

“The risk of negative equity is mitigated by the fact that homeowners hold their properties for long periods of time and the Australian labor market is at its highest level in 50 years,” she noted.

“CoreLogic’s resale analysis shows that homeowners have a median holding period of around nine years.

“The historical performance of the Australian property market has shown that peak to trough declines last an average of 12 months nationally.”

In other words, like the Reserve Bank, Ms Owen believes the vast majority of people will be able to afford higher mortgage repayments and few will default and be forced to sell at a lower price. at their purchase price.

However, Tindall identifies another risk of having negative, or even low, equity in your home.

“While the government has made it easier for first-time home buyers to enter the market under this program, it will not be as easy to get out of it,” she said.

“Falling house prices have the ability to blow that timeline and could see some first-time home buyers stuck in their property much longer than expected.”