What You Need to Know Before Applying for the Budget’s First Home Guarantee

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With house prices soaring across the country, getting on the property ladder – and especially saving for a deposit – can seem impossible.

This year’s budget includes millions of dollars to expand home loan guarantee programs to 50,000 places a year, in an effort to help more people enter the housing market sooner.

The programs primarily allow first-time home buyers to secure a mortgage with a low down payment of between 5 and 20% of the property’s value.

A plan for single parents only requires a minimum deposit of 2 percent.

Loans with deposits of less than 20% are considered risky by financial institutions, which makes it more difficult and more expensive to obtain a home loan.

Under these programs, the government guarantees part of the mortgage, which means borrowers don’t have to pay lenders expensive mortgage insurance, which protects the bank if you default and can’t repay your mortgage. ready.

So what are the pros and cons?

How it works?

First-time home buyers can apply for a loan with a down payment of just 5% of the property value and single parents can apply for a down payment of just 2% to buy a first home or re-enter the property market.

There is also a new program to help people buy or build homes in regional areas.

You apply to the program through a participating lender, so not all banks can offer the loans.

And you must show proof of your deposit.

There are caps on the value of homes that can be purchased under government guarantee programs.(ABC News: John Gunn)

Capping income and property prices

There are income limits and limits on the value of the property you can get the loan for.

The plan is capped at $125,000 in annual income for individuals and less than $200,000 per year for a couple.

You must be a homeowner and the term of the loan is limited to 30 years.

And you have to repay the loan principal and interest.

Also, the value of the property must be within the limit of the suburb and zip code where you are buying.

For example, New South Wales limits property value to $800,000 for capital cities and regional centers, while the cap is $600,000 in regional areas.

In Perth and Hobart, property prices are capped at $500,000.

A table showing house price caps for the Housing Guarantee Scheme
Capping of real estate prices for the Home Guarantee Scheme. (National Housing Finance and Investment Corporation (provided)

Interest rates may be higher

Since low deposit loans have what is known as a high loan to value (LVR) ratio, they are considered riskier by banks.

Home loan comparison website RateCity says this means some banks charge borrowers a higher interest rate on the program over their discounted variable mortgage rates because they think you’re more likely not to. repay your loan.

RateCity’s research director, Sally Tindall, explains that this is also because a limited number of financial institutions are involved in this program.

For example, two of the Big Four banks currently charge borrowers with an LVR greater than 80% a rate of 2.99% compared to the lowest variable discount rate of 2.19%, a difference of 0, 8%.

Ms Tindall says some smaller lenders, like mutual banks and credit unions, offer rates as low as 2.14%, so it pays to shop around.

There is a consensus among economists that interest rates will almost certainly rise this year, the only argument being when they will start to rise and how far they will reach.

“Buying with a 5% down payment means a person’s loan amount is significantly larger than if they had bought with a 20% down payment,” Ms Tindall warns.

What about real estate prices?

Ms Tindall agrees with several housing analysts who say there is a risk that the government subsidy could initially push up housing prices further.

Sally Tindall, RateCity
RateCity’s director of research, Sally Tindall, says low equity levels make it very difficult to refinance a loan and switch lenders.(ABC News: Daniel Irvine )

“Over the past year, according to ABS data, we have seen the largest annual rise in house prices [on record] by 23.7%”.

Real estate research firm CoreLogic said the expansion of the program could push prices higher at the bottom of the market as more people will be able to buy homes.

“I think this could benefit first-time buyers entering the market before prices can potentially rise as a result of the program,” says real estate data provider and forecaster Louis Christopher, who heads SQM Research.

The program started small in 2020 with 10,000 borrowers, and expanding to a total of 50,000 places will potentially lead to a significant increase in demand for certain property types in certain areas.

Negative equity risk

Then there’s the other real estate price risk – that despite increased demand from first-time home buyers thanks to the scheme, other factors cause property values ​​to start falling.

Negative equity occurs when the value of your property falls below the amount you borrowed.

That’s a big risk, according to Ms. Tindall and Mr. Christopher.

They both fear that higher interest rates could drive house prices down later in the year, and Mr Christopher warns this could leave many people who use the scheme in dire financial straits.

RateCity calculated the figures using Westpac’s interest rate and house price forecasts and warns that negative equity is a real risk for first-time home buyers and single parents using the program .

a chart showing negative equity for borrowers if interest rates rise
RateCity says Home Guarantee Scheme buyers could see their capital decline if interest rates rise and their monthly mortgage payments rise. (RateCity (provided))

Ms Tindall says the government and opposition are encouraging people to take on more debt, despite regulators like the Reserve Bank’s Dr Philip Lowe telling borrowers they need “buffers”.

“Encouraging people to buy at inflated prices with almost no buffer against rising interest rates carries some pretty serious risks,” she warns.

Ms Tindall also warns that low or negative equity means borrowers will struggle to refinance their loans to get a better deal.

“If property prices then fall, people using this system also risk being locked into their lender and guarantor for longer.”

IMT could increase

The Insurance Council of Australia warns that extending the scheme could also have ‘unintended consequences’, such as increased lender mortgage insurance (LMI) premiums for other home loan borrowers who do not use government programs.

Chief executive Andrew Hall thinks this could hurt small and medium-sized lenders and reduce competition in the market.

He says the IMT gives people with small deposits the chance to enter the housing market sooner because they don’t have to save for a larger deposit, but their loans are considered by financial institutions. as more risky.

“You would naturally assume that because they only have 5% of a deposit to get into a house, they would be a higher risk,” he explains.

Who has used the guarantees so far?

Nearly 60,000 first-time home buyers since January 1, 2020.

Government figures show that one in five guarantees have been given to essential workers. Of this group, just over a third were nurses and another third were teachers.

Women received 52% of guarantees and 85% of family housing guarantees went to single mothers.

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