New rules could get first home buyers into market 7 years sooner

Aussies looking to enter the housing market for the first time could slash the time needed to save a deposit by the better part of a decade, but purchasing with a smaller deposit could come at a cost.

The Home Guarantee Scheme lets eligible first-home buyers purchase with as little as a 5% deposit, avoiding potentially thousands in Lenders Mortgage Insurance (LMI). 

Its expansion, effective 1 October, will see place limits and income caps scrapped, while property price thresholds will be raised to better match median prices around the nation.

But while the Home Guarantee Scheme’s expansion is “a real game-changer,” Domain chief of research and economics Nicola Powell warns “it’s not a magic fix”.

First home buyers slash deposit savings time by up to 7 years

As of Wednesday, Sydney buyers purchasing a property worth the maximum allowable price under the scheme – $1.5 million – may need to save for just three years, rather than the decade they might need to secure a 20% deposit, new analysis from Domain shows.

Buyers in Melbourne and Brisbane might find themselves wiping nearly six years off their savings journey, securing a deposit in just over two years.

But entering the market with a smaller deposit can come at a significant cost.

“Buyers will still face bigger mortgages and the risks that come with rising interest rates and potential property price drops,” Dr Powell said.

“We also expect a fresh wave of demand, which could ramp up competition and push prices higher in more affordable areas, especially if supply doesn’t keep pace.”

Soaring rental prices could offset extra interest costs

The trade-off between home loan interest and rent is being sharpened by the soaring cost of the latter.

According to Cotality, the tens of thousands – or even hundreds of thousands – of extra interest a first home buyer might pay by putting down a 5% deposit rather than a 20% deposit could be dwarfed by the rental expenses they’d otherwise face.

“Even though a smaller deposit means paying more interest over time, it could still work out cheaper for renters,” Cotality Australia head of research Eliza Owen said.

“Since January 2020, the median weekly rent across Australian dwellings has increased an estimated $200 per week to $669.

“Getting into a home sooner may mean spending less time paying rent, and those savings can add up.”

Considered alongside potential LMI savings of up to $80,000, some Sydney first home buyers could save as much as $96,250 by turning to the expanded scheme.

Though, Ms Owen notes the figures included in the chart above should be taken as illustrative rather than indicative of the financial ramifications first home buyers face.

Scheme expansion sends buyers into a ‘frenzy’

The loudest criticism facing the scheme’s expansion is its potential impact on property prices – a concern that has already proven worthy, according to the Real Estate Buyers Agents Association of Australia (REBAA).

“Markets are already in a frenzy, let alone what the next few months will bring once the scheme has started,” REBAA president Melinda Jennison said.

Ms Jennison observes prices are already jumping, with homes in key price categories selling for $50,000 more in just a month.

“Properties that were selling for $750,000 last month are now selling for close to $800,000,

“What was $800,000 will soon be $900,000, which will make it even more difficult for first timers to secure finance for a home – even with the scheme’s 5% deposit on offer.”

Treasury modelling conducted before the scheme’s expansion was announced found it would lead property prices to rise just 0.5% over six years, while previous analysis by Proptrack found the scheme largely hasn’t impacted property prices since its 2020 introduction.

However, Ms Owen is among those noting the impact will likely be noticeable in the near-term.

“There will almost certainly be a short-term boost to home values up to the threshold of the scheme, coinciding with interest rate falls and tight levels of housing supply,” Ms Owen said.

“While individuals on the scheme could leap over the deposit hurdle faster, this policy is ultimately a demand side stimulus which fails to address why deposits – and now rents – are so unaffordable in the first place.”

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