Scott Pape’s home deposit warning as governments splash the cash

Scott Pape says it won’t win him any votes, but here’s what he thinks about governments enabling low-deposit mortgages.

WHACK!

Last week I got the Treasurer to answer readers’ questions, and the verdict was swift and brutal:

Old Jimbo may have been Barefoot for the day, but readers thought the bloke had bunions!

Yet for me it was his advice to a young first home buying couple – that they only needed to save up a 5 per cent deposit (thanks to the Government’s First Home Loan Deposit Scheme) – that caused my left eye to twitch and made me sweat all the way down to my mangoes.

My view?

Look, it’s not going to win me any votes, but I believe that if you can save only a 5 per cent deposit … then you really can’t afford a house.

Yet in 2021, then-Treasurer Josh Frydenberg basically said “hold my beer”.

He expanded the First Home Loan Deposit Scheme (FHLDS) to “help” low-income single parents, and lowered the deposit required to just 2 per cent!

Then came Labor.

Now Albo was famously raised by a single mum in public housing. So he must have known in his bones that this was a very dangerous policy. And that it would not just legitimise but actually incentivise vulnerable people to make a highly risky financial decision … at a time when interest rates were at record lows and house prices were at record highs. However, in the heat of the election he too joined the 2 per cent down party with his shared equity Help to Buy scheme.

What could possibly go wrong?

Well, let’s fast-forward a few years and hear from Jane, who wrote to me a few weeks ago.

“Scott, I went against what you recommended, but the government said they were helping me buy a unit with a 2 per cent deposit for my child and me. I’m a low income earner and also an immigrant with a parent overseas who I’m providing for. I’ve made it work so far by taking on extra work on the weekends. But the fixed rate with my bank changes over (higher!) in a few months and I’m terrified. Do you think moving banks will help keep the variable rate manageable when it’s my turn at the cliff?

Treasurer Jim Chalmers was not popular as a Barefoot Investor guest columnist. Picture: NCA NewsWire/Glenn Campbell

The fact is, Jane has about as much chance of moving banks as Peter Dutton has of being Prime Minister.

For the record, I called Jane and put her in contact with a financial counsellor in her area who will work with her – and her bank – to try and find a way forward.

But it won’t be easy.

She pretty much had zero equity in the joint to begin with, and it went down from there. So not only is she deeply in the red but, more importantly, her interest rate is about to triple, and her repayments could take food off her table.

I don’t blame her for wanting to buy her home, and provide financial security for her kids. The problem is she trusted that the politicians were acting in her best interest … not theirs.

Now let me get off my soapbox and introduce you to someone who not only thinks I’m dead wrong … but can prove it.

Tread Your Own Path!

Admit It: You Were WRONG, Barefoot

Scott,

Late 2020, hubby and I were renting a granny flat in Sydney for $520 a week. He saw on the news that house prices were set to rise as much as 30 per cent and said we needed to buy our first home ASAP. The boom had started. We managed to scrape together a 5 per cent deposit and bought our townhouse 15 minutes from the Wollongong CBD for $565,000. Our house is now worth about $750,000. There is NO WAY we would have been able to buy our house with a 20 per cent deposit if we waited! And, because we bought at a time when rates were at a historic low, we got that benefit too, locking in 1.98 per cent for three years. Again, if we had waited we could have ended up buying now, when rates have more than doubled. You are not always right, Scott. You KNOW there are scenarios where your rules do not always apply … and this was one of them.

Linda

Hi Linda,

So were you lucky, or smart?

The thing I’ve learned about people who make money through luck is they tend to believe they’re smart, and you can’t convince them otherwise.

Personally, I don’t think the value of your home matters that much (though prices in Wollongong have come back 14.5 per cent in the last 12 months, according to realestate.com.au).

In other words, you’re talking paper profits – let’s instead talk bangers and mash: you’ve said that you’re not a saver, so you don’t have much money behind you. In the next few months your repayments are going to skyrocket. Will you be able to make them?

The most important question you need to ask right now is “How long will my luck last?”

Patronising, Condescending and
Out of Touch

Scott,

Reading Jim Chalmers’ last week set my teeth grinding, but what really made my blood boil and shoot flames from my ears was his answer to Emma about rent rises.

Jim’s suggestion that she “report excessive increases to a relevant state body” shows just how safe he is in his house, and that he doesn’t have to worry about landlords. We all know that we can “report excessive rent rises” but we also know that landlords find loopholes to exploit (like “we’re doing maintenance on the property” or “we’re selling and you have to leave”) and then relist it at a much higher rent a short time later. Our landlord did this to us to the tune of $80 a week after we’d been living there for four years (making minimal maintenance requests and always being a month in advance with the rent).

Jimbo blithely says the “government is trying to bring in tax breaks to get more rental properties built”. That’s not helpful, Jim, that’s patronising and condescending and shows how elitist and out of touch you are. People need real help right now.

Dana

Homebuyers and home loans are Scott Pape’s big focus this week. Picture: iStock.

Hi Dana,

This week I got a window into what it’s like to be Jim Chalmers (or any politician for that sake) – and I did not like it one bit! My inbox exploded with angry readers … and it was the renters who were really up in arms.

I agree with you: I don’t think Jim understands what it’s like to be a renter on a low income right now.

Then again, to be honest, neither do I.

The housing market is fundamentally broken in this country, and it has been for years. Jim is smart enough to know that there are no short-term magical fixes: any steps to ‘protect’ renters can either be sidestepped (as you point out) or can result in landlords jacking up their rents to compensate.

What Drugs Are They Smok’n?

Scott,

I struggle to relate to the questions you get. A couple earning $160,000 a year can’t save 20 per cent for a deposit, or a single mum edging up to $100,000 a year is struggling financially. What kind of expensive neighbourhood and lifestyle are you readers living?

I’m lucky if I earn $50,000 a year, and we are a single-income family with five young children. Yet we have been able to save up a 20 per cent deposit and have purchased a house, which we are currently renting out (yes we have a mortgage that will take years to pay off, we just didn’t over-capitalise).

We travel the country in a little pop-top caravan, homeschooling our kids while I work online. I don’t believe in sponging off the government either, so we don’t put our hand out for welfare payments.

You don’t need to be earning big bucks to have a valuable life in this country, and kids don’t need to go to some posh school or have after-school care to get educated or be successful. Being able to spend time with those you love is what makes you truly rich.

Darren

Hi Darren,

You’ve discovered what a lot of people eventually work out when it’s too late: debt enslaves you.

And that if you can avoid being in too much debt you’ll be happier.

Life is short, and the time you have with your kids is even shorter.

You Got This!

Information and opinions provided in this column 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

Barefoot Kids: Your Epic Money Adventure! (HarperCollinsPublishers) RRP $32.99

If you have a money question, email [e-mail].

Originally published as Scott Pape’s home deposit warning as governments splash the cash