If you’re a first homebuyer, scouring the spring market seeking a mix of value and investment, you might be wondering whether the Government has done you a favour by offering to underwrite up to 15% of your home loan.
The seemingly generous scheme, called the Home Guarantee Scheme (HGS), allows first-time buyers to purchase with a 5% deposit and avoid Lenders Mortgage Insurance (LMI), a one-off policy that costs tens of thousands of dollars to protect the lender from you defaulting.
Many describe LMI in highly unfavourable terms, identifying the fact that if you are a young buyer and cannot make a 20% deposit, then you are forced into an extraordinarily expensive policy.
And it is a one-off payment, so even if you pay the premium every month you don’t get to stop paying it once you’ve reached 20% equity in your home.
The Government’s decision to rewrite the HGS more favourably is at least an acknowledgement of how tough the market has become for first-time buyers.
And its new policy is also complemented by various state programs, such as First Home Buyers Grants and relief from stamp duty levies.
The downside has been the impact on prices. As an experienced agency, we are already seeing increasing values in the lower-end of the housing market – where first-time buyers often compete with investors.
Head of Research at Cotality, Eliza Owen, says that while the policy helps individuals buy sooner, the “demand-side stimulus” of the government program “does little to address why deposits — and now rents — are so unaffordable in the first place”.
General consensus suggests the lack of supply of new homes is the reason why prices and rents are at record levels.
Cotality points out that by buying with a 5% deposit, you have a loan-to-value ratio of 95%, which means the interest over the term of a 30-year loan will be significantly higher than normal.
Ms Owen says the main cost of the program “is extra interest paid over the life of a loan. The flipside of a 5% deposit on a home purchase is a 95% loan to value ratio on the home loan”.
What’s the alternative? For most young people, it’s either continuing to pay rent for an even longer period – and that’s “dead money” – or remaining under the roof of a parental home, which isn’t desirable for the majority, either.
While most first-time buyers do not enter the market with a 20% deposit, Cotality has done the sums on the benefit of using the scheme. If you bought a two-bredroom flat in Sydney for, say, $1.5 million, you’ll shorten the period of saving for a full deposit by an estimated 12 years.
Over that period, you’d have spent more than $500,000 on rent, according to Cotality.
So, while the new government policy has fired up critics, first homebuyers have the best chance for breaking into the market today. As prices edge higher because of demand, the sooner young buyers make the move, the better off they’ll be.