Barefoot Investor Scott Pape warns first-home buyers to ‘avoid’ Morrison Government’s Home Guarantee Scheme

I don’t need your vote, so I’ll tell it to you straight: avoid the government’s Home Guarantee Scheme. This is why, explains Barefoot Investor Scott Pape.

As I sip my morning coffee – the day after the night that was (Budget night!) – let me share with you a reader email that popped up in my inbox which frames things nicely:

Dear Barefoot,

I’m angry, and sad, and frustrated, and my anxiety is overwhelming. Despite being in the top 10% of earners ($175,000 combined income) in the world, it will take us another eight years to be able to have a deposit on a home.

I picked up a copy of your book three years ago and haven’t looked back. But the housing market is sickening. Even with saving and saving and saving, house prices in our area are $1.3 million. My partner’s family all live in the area. My daughter will be starting kinder in 2024, and once she starts I do not want to pull her out and make her change schools. I want to settle in one place.

Do we continue renting for eight years until we can afford a 20% deposit, and stay near family and the community of friends we have? Or do we move two hours away and purchase something we can afford? I feel sick on a daily basis and run the numbers over and over. I don’t know what to do. I don’t want to rent forever, but my security network of family and friends is here.

Worried Mother

I have no answers for this worried mother … well, none that she wants to hear.

However, this year’s Budget does.

Barefoot Investor Scott Pape. Picture: Supplied

The Government has increased the Home Guarantee Scheme to 50,000 places. The scheme allows first-home buyers on low incomes to buy a home with just a 5% deposit. And for single parents it’s even less … all they need to scrounge up is a piddly 2% deposit.

Hang on a minute!

Isn’t this entire budget about the rising cost of living?

Why is the Government encouraging low income earners to load up on huge amounts of debt at a time when interest rates are rising?

Well, as I’ve said in the past, the federal budget is part economic doctrine, part political advertising. And, given this is an election year, both sides are looking to ‘help’ our worried mother … but without harming those who own homes … whose vote they also want.

How does that work?

It doesn’t, and for a very simple and obvious reason: giving people extra money to buy a home just filters through the market and makes all houses more expensive.

Yet this balls-up is bipartisan: both the Coalition and Labor have plans for the Home Guarantee Scheme as part of their election pitches.

It would be a mistake to think that politicians have a crystal ball. Case in point, the economic forecasts in previous budgets have proven to be as accurate as my footy tipping.

(Read: not accurate at all.)

Yet the one thing they are on the money about is that the times are a-changin’.

We haven’t had a rate hike since November 2010 (around the same month that the movie Social Network was released, back when we all thought Mark Zuckerberg was a pretty cool guy).

However, in the next couple of years interest rates could head much higher. Should they follow a similar pattern to previous hikes, we could see homeowners having to cough up an extra $500 a month on a $500,000 home loan.

If that happens, many people in this scheme could find themselves under water – owing more to the bank than their house is worth. (It doesn’t take much of a dip – if you only start with a 2% or a 5% deposit … you basically only own the front door handle). And it’s you and me – taxpayers – who will be on the hook for the losses.

Luckily, I don’t need your vote, so I’ll tell it to you straight: avoid this scheme.

Check out Scott’s column every Sunday. Information and opinions provided in Barefoot Investor columns are general in nature and have been prepared for educational purposes only. Always seek personal financial advice tailored to your specific needs before making financial and investment decisions

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