Will the government’s first home loan deposit scheme really help FHB's? Cameron Kusher
EXPERT OBSERVER
In the lead-up to the recent Federal election the Coalition announced the First Home Loan Deposit Scheme.
The scheme will provide up to 10,000 loans to first home buyers each year and will offer first home buyers better access to finance without having to save a 20% deposit.
Additional details about the plan include: The Scheme will be available to eligible first home buyers who have been able to save for a deposit of at least 5% up to 20%. This will mean that eligible first home owners will be able to purchase their own home years earlier than they would normally be able to do.
Also, they would not be required to purchase lenders mortgage insurance saving them approximately $10,000. The lender would still undertake the full normal credit check process on the borrower (meeting all their legal obligations) to ensure that the borrower is in a position to be able to afford the repayments.
If the borrower refinances or the loan comes to an end the Commonwealth support will terminate. The Scheme will support low and middle income earners across Australia. Support would only be available to first home buyers below a certain capped income level which is $125,000, or $200,000 combined income for a couple who are both first home buyers.
The income test would be based on the previous year’s taxable income to provide certainty. Support will also be targeted to entry properties, with a maximum loan size determined on a regional basis, reflecting the different property markets across Australia.
The first home buyer will be able to use the Scheme in conjunction with the First Home Buyer Super Savers Scheme (FHSSS) and State or Territory first home buyer grants and duty concessions. The Scheme will commence on 1 January 2020 and will be operated by National Housing Finance and Investment Corporation (NHFIC).
Support for borrowers could include guaranteeing approved applicants the additional loan amount taken out by the first home buyer to cover the difference between the amount of the first home buyer's deposit and 20 per cent of the value of the property. While there aren’t a whole lot of details about the plan there are some important things to consider with this plan.
1. Over the past 10 years there has been an average of 103,485 first home buyer finance commitments per annum. Given this, only around 10% of first home buyers will be able to access this scheme.
2. A 20% deposit is not actually required to take out a mortgage. Buyers can borrow with less than a 20% deposit. If they choose to do so, LMI is either an additional upfront cost or amortised into the mortgage amount. LMI is not transferable so if you choose to refinance or sell and purchase but still have less than 20% equity, LMI will be payable again.
3. The borrower will still need to pass normal credit checks. Over the past four years or so it has become increasingly more difficult to access a mortgage and borrowers participating in this scheme will still need to pass the normal credit checks. Given this, the scheme, as proposed, is not going to result in anyone that currently can’t access a mortgage to take out a mortgage. What it will mean is that people that already qualify for a mortgage can potentially avoid LMI and they can also purchase with a smaller deposit.
The scheme is positive in that it allows first home buyers to borrow with a smaller deposit and without LMI. The benefit of this is they can potentially own a home earlier. From a housing affordability perspective it is difficult to see how this policy actually helps.
Given that borrowers still need to pass usual credit checks, the only people that will have access to the scheme are those that could already purchase any way. While the scheme will help borrowers enter the market earlier, it seems unlikely that it will do anything to improve housing affordability.
If anything, it might increase demand from first home buyers and lead to higher prices within the price points that fit with maximum loan sizes which have not yet been determined.
Some more strategic alternatives to improve housing affordability can be found on the supply side via town planning reforms to allow for higher densities in high demand areas, improving accessibility to affordable housing markets via infrastructure upgrades and re-thinking inefficient taxation transactional taxes such as stamp duty.
CAMERON KUSHER is the head of research for the Australian branch of CoreLogic
Kusher regularly posts on the CoreLogic website.