‘Hidden’ cost of government’s low-deposit home scheme revealed

NSW Tenants Union CEO Leo Patterson Ross said the scheme could make it harder for future first-home buyers to get into the market because price rises. Picture: Jonathan Ng

Hopeful home seekers are being warned of the true costs of buying through the government’s recently expanded First Home Guarantee Scheme.

It follows revelations the incentive will cost homeowners up to $244,000 more in repayments over the life of their loans due to the higher debt burden.

The scheme allows eligible first-time buyers to purchase properties with deposits of just 5 per cent and have government guarantee the rest of a 20 per cent loan, saving buyers pricey lenders’ mortgage insurance.

The policy was expanded in October with the removal of salary caps and an increase in price caps for eligibility – to $900,000 in Melbourne, $1m in Brisbane and $1.5m in Sydney.

But new research has laid bare the staggering extra cost of the larger loans supported by the policy, which are typically higher than the amounts buyers would be saving on lender’s mortgage insurance.

The Finder study revealed those buying a Sydney unit at the median price of $808,000 would pay about $131,000 more in costs over the course of a 30-year mortgage compared to using a traditional 20 per cent deposit.

Expansion of the First Home Guarantee was a pledge made during Albanese and the ALP’s campaign for re-election earlier this year. Picture: Hilary Wardhaugh/Getty Images

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First-home buyers buying at the Brisbane median unit price of $698,000 would pay about $113,000 more over the life of the loan, while those buying at the Melbourne median of $600,000 would pay $98,000 extra.

Finder home loans expert Richard Whitten said the extra costs were down to the difference between borrowing 80 per cent of the value versus 95 per cent.

“A bigger loan over 30 years ends up costing you a lot more in interest,” he said.

The burden of a 95 per cent loan was even higher for those buying houses at typical prices.

Sydney’s current median of about $1.62m is above the $1.5m price cap for the scheme, but those who buy just under the cap at $1.499m will pay about $244,000 extra over 30 years, the study showed.

Lenders mortgage insurance on the same purchase would have been about $55,000-$80,000.

The extra cost of 95 per cent loans for those buying at Brisbane’s median house price of $980,000 would be $160,000 over the 30 years, while the extra cost for a typical Melbourne house would be just under $140,000.

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The demand-side scheme has coincided with sluggish housing construction, which some argue could mean price increases.

The lenders’ insurance on these purchases would have been $30,000-$52,000, according to online calculators.

Given the unpredictability of interest rates over prolonged periods, the research only took into account current lender interest rates, which average about 5.69 per cent.

There’s a chance homeowners may actually pay higher rates over much of their loan terms as economists warn sticky inflation has raised the possibility of interest rate hikes in late 2026.

Mr Whitten said those using minimal deposits through the scheme could be locked into their pricier loans without the option of selling if there was a market downturn.

“Buying a house with a very small deposit is riskier,” he said. “You’re also more vulnerable if prices fall: you don’t own much of your own house to start with. This makes it trickier to sell the property or refinance the loan until you repay a fair bit of the loan.”

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Finder home loan expert Richard Whitten.

NSW Tenants Union CEO Leo Patterson Ross said a more likely outcome is that prices will rise as a result of the scheme, given current housing shortage.

He said the scheme would come with extra expenses for both those accessing it and the next wave of people trying to leave the rental market.

“People have to borrow more and more to get into the market and that just keeps pushing up the prices,” he said. “It (makes it) harder for the people coming behind the first buyers to get properties.”

Mr Whitten said there were advantages to the scheme. “There’s the benefit of entering the market earlier,” he said. “It’s hard to sit on the sidelines and build your deposit while watching property prices go up.”

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