First-home buyer 5% scheme: What your home loan could actually cost you

Experts warn the Home Guarantee Scheme will have an inflationary impact on the market and warn that home buyers could ultimately end up paying more for their home loan.

An influx of first-home buyers will be preparing to enter the market between now and Christmas as the expanded Home Guarantee Scheme comes into effect.

From 1 October, the expanded scheme offers unlimited places, no income caps and increased property price caps to help more Australians buy their first home sooner. The scheme has already supported more than 240,000 home buyers buy a home.

But some are concerned about the potential for desperate buyers to search for loopholes that can be used to exploit the Home Guarantee Scheme and get them in the market, even if they don’t meet the eligibility criteria.

Others are querying the veracity of the scheme, particularly given it’s potential to force an inflationary impact on the estate market.

New South Wales-based Mortgage Choice mortgage broker Rob Lees has seen the scheme exploited in the past.

He recalls seeing incidents first-hand where first home buyers using the Home Guarantee Scheme buy a property only to move out of the home, and to still qualify for the guarantee, have placed a friend or family member in the property as a boarder and continued to nominate the property as their primary residence, including their mailing address.

Paying more interest

Economists anticipate the expanded scheme is expected to come at a cost, both to individuals who take the scheme up, and also to the broadening housing system.

“The main cost for individuals 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, ultimately costing the buyer significantly more in interest repayments.

Melbourne-based Mortgage Choice mortgage broker Paul Williams notes that the Home Guarantee Scheme has already also started to have an almost immediate inflationary impact on the already expensive housing market.

Home prices have been on an upwards trajectory for nine months now, with the PropTrack Home Price Index showing values are 6.2% higher than this time last year.

Mr Williams recently helped a Melbourne first home buyer looking for a home loan, who intends to access the Home Guarantee Scheme.

But the buyer is now competing for properties with Sydney investors seeing value in the more subdued Melbourne market and an influx of first home buyers also hoping to access the expanded Home Guarantee Scheme.

The average price of a home in Sydney is currently sitting at $1,213,000, while a home in Melbourne only sets you back an average of $839,000.

“This has resulted in prices being pushed up almost immediately, with vendors previously selling around the $800,000 mark are likely to put a higher price on their property due to their being more buyers in the market,” Mr Williams says.

Despite the higher asking prices, buyers are not being scared off, with expectations of another rate cut in November still strong. 

“Buyers understand the economics of the housing market and are backing themselves and trying to get into the market anyway they can,” Mr Williams says.

Pushing up prices

Rethink Residential director Mina O’Neill believes the scheme is already being unfairly accessed by the wealthy, who are leveraging it by providing deposits in their children’s names.

“What’s intended to improve affordability risks widening inequality, as family wealth accelerates access for some while leaving others behind,” she says. 

“With the cap raised to $1.5 million in Sydney, no limit on places from 1 October, and varying thresholds across states, the scheme is expected to add further fuel to a fast-moving market.”

The unique convergence of falling rates, more stock hitting the market and powerful policy incentives is creating opportunities for buyers, but also fierce competition.

“These schemes are always going to put prices up because you’re increasing demand instead of addressing the supply, they’re trying to just pump up the market,” Ms O’Neill explains.

How it works

Home buyers usually need a deposit of 20% of the value of the property to secure a home loan. Those with a smaller deposit may be required to get Lenders’ Mortgage Insurance.

Under the Home Guarantee Scheme, Housing Australia provides a guarantee to the lender so home buyers only need a 2% or 5% deposit, supporting buyers who have saved a small deposit and meet other eligibility criteria to get a home loan to buy a home.

Couples were previously excluded from the scheme once their combined income surpassed $200,000, while singles had to earn less than $125,000 to qualify. Those caps will be removed.

The scheme will also significantly increase the range of suburbs available to first home buyers around the nation.

Counting the cost 

National home prices are up 6.2% over the past year, adding around $52,000 to the value of the median home, and have surged over 50% in the past five years.

National Australia Bank (NAB) is a lender for the scheme and has extended more than 46,000 home loans to first home buyers under the scheme, proving the scheme is big business for the sector.

NAB executive home ownership Matt Dawson says the initiative is helping address affordability challenges but adds that boosting supply remains critical to easing the housing crisis.

“It’s important that we continue to see more homes built,” he says.

“Improving supply alongside initiatives like the Home Guarantee Scheme is key to addressing the housing challenge in Australia.”

This article first appeared on Mortgage Choice and has been republished with permission.

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