Home loan deposit plan a good deal for lucky few

The Home Loan Deposit Scheme outlined this week is not so much a grant scheme as a lottery for first-home buyers.

The maximum number of grants available under the home loan program each year is 10,000.

The high-profile Home Loan Deposit Scheme outlined by the government this week is not so much a grant scheme as a lottery for first-home buyers.

Unfortunately, the ratio of excitement around the scheme is in inverse proportion to its reach. Basically, the maximum number of grants available under the program each year is 10,000, a fraction of the total demand nationwide each year.

EXPLAINER: How first home deposit scheme works

Officially, there are about 100,000 new homebuyers in the market annually, but this number does not include those with insufficient funds who aspire to join the market: that figure is closer to 450,000, according to industry analysts.

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Though the scheme has been getting lavish attention since it popped up unexpectedly during the election campaign in May, it will not begin until January 1.

One of the scheme’s most open critics, Martin North of the Digital Analytics group, says: “It’s a pimple on an elephant’s head. I see it as little more than a political move.”

Yet anticipation about the scheme remains strong for the simple reason it looks like a good deal for those with a winning ticket.

Looks good for the lucky ones

In effect, the first-homebuyer only needs a 5 per cent deposit, with the government stepping in to transform this into a 20 per cent deposit through a guarantee — the guarantee in the deal will mean the buyer does not have to pay mortgage insurance.

The program will only be available to singles with a taxable income up to $125,000 a year and couples earning less than $200,000 a year. Separately, it will only apply to owner-occupier loans on a principal-and-interest basis.

So far, so good. At it’s best for the lucky few it will be like having a benign aunty in the form of Treasury: though no doubt the scheme sits uneasily with Treasury bureaucrats who have traditionally let state governments do the running on first-homebuyer grants.

Check those details

But then this federal experiment in mortgage insurance gets very complicated. The federal government has decided that it will be regionally weighted with different price caps for different regions: the maximum mortgage in Sydney is $700,000, but in parts of Western Australia it falls to $300,000.

Confusing? Wait, there’s more. The government also wants major banks and regional banks involved.

Though there is some evidence that the proportion of first-home buyers within the wider market may rise when such schemes are introduced, there is none whatsoever suggesting this restricted scheme will reverse a deep decline in first-homebuyer activity, which had totalled about a third of all home sales in Australia for many years before sinking to below 10 per cent at the depth of the last affordability cycle in 2016-17. First-home buyers are now back at something close to 12 per cent of the overall market.

“The evidence in the UK on similar schemes is not encouraging for people who entered schemes where they did not pay the proper price for a property and were given help like this,” says North.

“These one-time first-home buyers can face real trouble if the home does not gain in price or they have other financial concerns — when it comes to refinancing they often face reality for the first time.”