No, you can’t buy a $1.3 million home on a 2 per cent deposit

First home buyers using the federal government’s Help to Buy shared equity scheme would need to tip in more than the minimum deposit to buy the maximum house.

The scheme allows a worker earning $100,000 a year to co-purchase a property with the government, provided the worker contributes a deposit of 2 per cent or more. The government will then pay for 30 per cent of the home, or 40 per cent if it is a new build.

First home buyers can get help from the government to purchase.Credit: Peter Rae

A home buyer could purchase a Sydney property for up to $1.3 million under changes to the scheme announced last weekend and due to take effect this year. They could buy a Melbourne home worth up to $950,000, a Brisbane home for $1 million, or a home in Perth for $850,000.

But banks would be unlikely to lend a buyer enough to take full advantage of the scheme on a 2 per cent deposit at current interest rates.

To buy the maximum home, buyers would need to contribute a larger deposit – or get help from the bank of mum and dad, even though it’s buyers without such help who are likely to be interested in the scheme.

A single person on a salary of $100,000 could borrow a maximum of $393,000, based on calculations from comparison platform Canstar, though some banks could lend slightly more.

That would give them a budget at auction of $577,941 if the government bought 30 per cent of the home and the home buyer paid a 2 per cent deposit.

The same buyer who chose a new home and got a 40 per cent government contribution would have a budget of $677,586.

A couple who earned a combined $160,000 could borrow enough to buy a home worth $969,118 if the government contributed 30 per cent and they had a 2 per cent deposit – enough to max out the scheme in Melbourne, but still short for Brisbane or Sydney.

If the couple chose a new home, their budget would rise to $1,136,207, so they would need extra savings for the maximum home in Sydney.

Canstar data insights director Sally Tindall said if interest rates fell, home buyers could borrow more from the bank and look at more expensive properties.

She thought the scheme catered to borrowers in various situations, including singles, couples and lower interest rate scenarios.

“I don’t think the government is saying ‘someone on $100,000 can buy a property at $1.3 million’. I don’t think that’s the intent of them changing the caps,” she said.

“I think they’re trying to make sure that [the] price cap covers a greater range of people in the scheme.”

She backed the program because it meant home buyers would have smaller mortgages than under the First Home Guarantee, with which they can borrow up to 95 per cent of a property’s value without paying lender’s mortgage insurance. But she encouraged buyers to look at the fine print, shop around for a competitive interest rate and seek advice.

Angus Gilfillan, chief executive and co-founder of mortgage broker Finspo, agreed that some buyers would need to raise a larger deposit to take full advantage of the scheme.

“The [price] caps are unlikely to be a limiting factor for singles,” he said. “And for people in NSW, the cap is not going to come into play.

“To get the $1.3 million property … they have to save bigger deposits. If they’re lucky enough to have the bank of mum and dad or some other type of equity guarantee, then that can help them get there.”

Home buyers must earn under a certain amount to be eligible for the assistance.Credit: Flavio Brancaleone

He said buyers would need to pay for stamp duty, depending on their total spend and state stamp duty costs.

Gilfillan said about 70 per cent of his first home buyer customers used some form of government scheme to help them purchase. He thought this scheme was attractive because it enabled purchases with a small deposit, no lender’s mortgage insurance and a lower home loan, though he said buyers should ensure they understood the details, such as what happens if their income rises above the set thresholds.

Ray White chief economist Nerida Conisbee thought the program would help individuals get into the market, but buying established homes would not increase housing supply.

She said similar schemes overseas had been criticised for helping buyers who were already close to achieving homeownership.

She noted there was no requirement for borrowers to have only a 2 per cent deposit, and that they could contribute more.

“If you have the government tipping money in, you had your parents tipping money in, you tip money in and the bank tips money in, it makes it a lot easier to get the property,” Conisbee said.

“But when you sell the property, you’re going to have to pay back quite a few people.”