First Home scheme will prove costly for buyers: expert

First home buyers may be placed at higher risk of default under the scheme.

The Federal Government’s First Home Buyer Scheme officially launched today, but a leading real estate expert has warned that the program’s promise of homeownership with as little as a 5 per cent deposit could leave buyers in dangerous financial territory, while costing them hundreds of thousands of dollars extra in interest over the life of the loan.

Aaron Scott, co-founder of the real estate agent comparison service bRight Agent, says the lure of a 95 per cent loan, without having to pay Lenders Mortgage Insurance (LMI), carries hidden costs that could leave first-timers financially exposed.

“Firstly, the true ownership percentage that you have is very small (just 5 per cent),” Scott said. “So if anything happens, you don’t have much equity remaining.

“Any impact to your property, such as natural disasters, termites, water leaks, or changes to your employment status, health conditions, etc, and you could find yourself very quickly in negative equity.”

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Negative equity, when the outstanding loan exceeds the property’s current market value, has historically left thousands of Australians trapped during downturns, unable to sell or refinance and at heightened risk of default.

bRight Agent founder Aaron Scott (right).

Scott says the second major risk is the repayment curve.

“Ask anyone and they’ll tell you the first decade of paying off your mortgage is the toughest. This period typically takes the smallest amount of principal off your loan, meaning you’re paying a lot and not really getting ahead,” he said. “A 95 per cent mortgage, however you cut it, is essentially just prolonging this difficult part of the cycle.”

The third sting comes from the banks. While the Government underwrites the risk, Scott says lenders are still gouging buyers through higher interest rates.

As of October 1, the big four all charge significantly higher rates for high Loan-to-Value Ratio (LVR) loans.

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“In one of the worst examples, CBA could slug first home buyers up to 1.6 per cent extra for a 95 per cent loan compared with an 80 per cent loan,” Scott said.

“On a $1 million property, that rate difference adds up to $1826 extra every month. The First Home Buyer Scheme should be about helping Australians into homes, not helping banks into bigger profit margins. This interest-rate disparity is price gouging on a national and generational scale.”

As is common with compound interest, the biggest difference is in the long-term cost of the loan itself.

An 80 per cent loan of $800,000 at 5.79 per cent costs about $1.688 million in principal and interest repayments over 30 years.

Prime Minister Anthony Albanese brought forward an extension to the scheme to October 1. Picture: Martin Ollman

A 95 per cent loan of $950,000 at the same rate costs around $2.004 million.

“That’s an extra $316,000 in repayments, simply because you took out a 95 per cent loan,” Scott said.

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While the scheme is designed to get younger Australians onto the property ladder sooner, Scott argues it could saddle them with decades of financial pain.

“It’s important to understand what you truly can afford, and prospective homeowners should be very cautious,” he said.

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