Assisted by James Duff.
Prior to the Coalition's shock victory in the recent federal election, Prime Minister Scott Morrison proposed a new 'First Home Buyer Deposit Scheme'. This scheme, aimed at first home buyers, seeks to address the issue of housing affordability across Australia.
Australia's housing affordability problem is complex and requires immediate attention. However, as is generally the case, the pre-election promises of politicians should be taken with a grain of salt - and with this in mind, it is important for the proposed scheme to be carefully examined.
Under the First Home Buyer Deposit Scheme, purchasers would only require a 5% deposit for a mortgage, as compared with the usual 10-20%. The scheme will be available to 10,000 people annually, with the Government acting as guarantor on the mortgages. As it stands, the Government plans to invest $500 million worth of equity in order to guarantee these loans.
The First Home Buyer Deposit Scheme does appear feasible at face value, and offers the benefits of:
- A lower required deposit, which will assist those struggling to save money;
- Helping buyers to overcome tighter lending by financial institutions;
- Allowing first home buyers greater access to Australia's housing market; and
- Buyers being able to save an additional $10,000 by not having to pay Lenders Mortgage Insurance.
With the above benefits in mind, the question must be asked: "what costs, both long and short-term, will first home buyers taking out mortgages under this scheme need to be aware of?"
While the short-term costs do suggest a highly beneficial scheme for first home buyers, the long-term costs do start to cast a dark shadow over the proposal. Some reports suggest that this scheme will cost first home buyers far more in the long run, with some experts coming out as critical of the fact that the scheme would load first home buyers up on debt - many of whom simply won't be in a stable enough financial position to take it on in an effective manner.
In assessing such criticisms, we look towards figures published in the Sydney Morning Herald's recent article: First-home buyers using government deposit scheme to pay thousands in extra interest.
For a property valued at $500,000, a buyer with a 20% deposit would be required to pay:
- A deposit of $100,000;
- A mortgage of $400,000; and
- $304,000 in interest over the life of a 30-year loan, with monthly repayments of $1,956.
Whilst a property of the same value purchased with a 5% deposit under the scheme would require the buyer to pay:
- A deposit of $25,000;
- A mortgage of $475,000; and
- $362,000 in interest over the life of a 30-year loan, with monthly repayments of $2,327.
If we assume that the property is valued at $500,000, a first home buyer who elects to pay a 5% deposit would be required to pay $371 more per month in order to service the mortgage. Whilst this might seem manageable on a month by month basis, the total additional cost is far more staggering, with first home buyers who opt for a 5% deposit being required to come up with an extra $58,000 in interest payments over the life of a 30-year loan.
Whilst the scheme is aimed at housing affordability, some economists predict that it has the potential to drive house prices up, as the scheme's introduction is likely to bring with it an influx of first home buyers with higher borrowing powers. Historically, increases in the demand for housing tends to drive property prices upward - with the only counteracting force being an increase in the supply of housing.
This of course leads us to ask the question: "what will be done to manage Australia's housing supply?"
With a look to answering this question, the Coalition government has announced a number of strategies, including a $1 billion injection of extra investment into local infrastructure, which aims to unlock housing potential, and the promise to release suitable state-owned land to be used for housing development.
The Home Loan Deposit scheme will work alongside the already in place First Home Super Saver Scheme (FHSS). First introduced in the 2017-18 budget, the FHSS has allowed voluntary concessional (before-tax) and non-concessional contributions towards superannuation funds. Participants in the scheme could then elect to have those voluntary contributions released by their superannuation fund in order to assist them with the purchase of their first home.
Australia's housing affordability issue undoubtedly requires ongoing attention from the country's political leaders, as we are yet to have reached anything close to a perfect solution. It should ultimately be noted that the impact of the First Home Buyer Deposit Scheme on the housing market is, at this early stage, merely speculative, with the only certainty being that the long-term interest payments will necessarily be far greater for those who choose to take out the 5% deposit under the scheme.
Coleman Greig will continue to follow thie progress of this scheme, as well as the real and potential impact that it may have on the Australian housing market.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.