Budget 2022: Loan boost for first-home buyers

Nearly a third of all first-home buyers would be supported by the government’s new expanded home loan guarantee scheme.

A home loan guarantee scheme can save a buyer with a small deposit thousands in lenders mortgage insurance. Picture: NCA NewsWire / David Swift

Nearly a third of all first-home buyers would be supported by the government’s new expanded home loan guarantee scheme, with the 35,000 guarantees now available each year set to be snapped up by young Australians desperate to break into an unaffordable housing market.

Josh Frydenberg on Monday announced that Tuesday night’s budget would include a permanent increase in the number of first-home guarantees per financial year from 10,000 to 35,000, starting from July 1.

Government incentives through Covid and a drop in borrowing costs drove the number of new first-home buyer mortgage commitments to more than 160,000 in 2021. But analysis by The Australian of Australian Bureau of Statistics data shows the number of first-home buyers has averaged about 100,000 over the past decade, suggesting the commonwealth from next financial year will be involved in guaranteeing a significant portion of all first-time buyers.

The scheme helps eligible FHBs purchase a new or existing home with a deposit of as low as 5 per cent, by guaranteeing up to 15 per cent of the value of the home. Usually borrowers with less than a 20 per cent deposit would have to pay thousands in lenders mortgage insurance and potentially face a higher interest rate.

For example, to buy a $500,000 property with a deposit of only $25,000, a loan applicant would need to pay about $15,000 to insure the bank against default.

Analysts have said making it easier to buy homes would simply add to the price of already over-inflated properties, and so provide only short-term relief to the affordability crisis.

However, REA Group director of economic research, Cameron Kusher, said a loan guarantee scheme was preferable to previous policies of providing cash payments to first-home buyers, as it did not translate as powerfully into higher prices.

“Cash handouts are more overt. If everyone knows you can get $14,000, that gets pushed into the price of the home,” Mr Kusher said.

He said the decision to expand the guarantee scheme was “a good measure”.

“It highlights the realisation that it’s difficult for first-home buyers, and that having to pay LMI means they have to wait longer to save a big enough deposit,” Mr Kusher said.

Nonetheless, the money saved on lenders mortgage insurance would likely be added to the purchasing power of the aspirational home loan, putting some upward pressure on home values, he said.

No recipient of the first-home buyer guarantee scheme has defaulted on their loan, which would potentially leave taxpayers on the hook if a foreclosure led to losses on the value of the home.

Recent research by the Reserve Bank of Australia found that first-home buyers appeared to be riskier than other owner-occupiers, at least during the first five years of the mortgage, as they tended to borrow more of the value of their home and had a lower savings buffer.

“While this might suggest FHBs would be more vulnerable than other borrowers during a negative income or housing price shock, recent experience indicates that FHBs have been no more likely to report financial stress or be in arrears,” the authors of the report said.

An August 2021 review by the National Housing Finance and Investment Corporation – or NHFIC, which administers the scheme – found “the speed with which each year’s allocation has been exhausted suggests there is significant unmet demand for places in the scheme”.