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§ RENT or BUY: First Home grants schemes: Time to the do the math
So, you’ve been paying rent but are struggling to save much towards a down payment on your first home.
Maybe your parents would like to help, but not to the extent of the 20 per cent deposit demanded by most lenders. Like $200,000 on a million-dollar property.
Now the federal government has loosened the strings attached to its First Home Guarantee scheme.
As of October 1, all first-home seekers are eligible to purchase with just a 5 per cent deposit. There’s no cap on the number of applicants, and no income limits.
Importantly, the eligible property price caps have been raised from $900,000 to $1.5 million in Sydney, to $1 million in Brisbane and Canberra, $950,000 in Melbourne, $900,000 in Adelaide, $850,000 in Perth, $700,000 in Hobart and $600,000 in Darwin.
Lesser limits apply to regional areas. Details are at housingaustralia.gov.au, but Cotality estimates almost 52 per cent of homes available nationally will now be within the limits, and nearly 94 per cent of units.
According to the Government, the median house price today is $844,000. Five per cent of that is $42,200. The last time $42,200 covered the 20 per cent deposit for a median home was in 2002.
The expanded scheme means a first-home buyer in Brisbane can purchase a $1 million home with a $50,000 deposit.
They could save up to 10 years off the time it takes to save for a deposit, save about $42,000 in mortgage insurance, and could pay up to $350,000 towards their own loan instead of paying rent.
Let’s do some more math on that example. A couple have a $50,000 deposit. They’ll need to borrow $950,000 from a participating lender at say 5.7 per cent, or about $5,500 a month in repayments.
They’ll stop paying rent, and in Brisbane that’s a median $2,800 a month for a house. Our couple still needs $5,500 minus that $2,800, or $2,700 a month to manage the loan. That’s $675 a week. The average weekly single wage is about $2,000 before tax.
That seems just manageable, though it would be easier if both worked. Spending more than 30 per cent of income on loan repayments risks financial stress.
The figures could also be improved if rent was less (say, on a $2,000-a-month unit), the purchase price lower, the deposit larger... and the interest rate better.
But AC’s enquiries to participating banks indicated no special rates on offer.
They said a 5 per cent deposit and 15 per cent government guarantee meant a loan could be assessed as if it were 80 per cent Loan to Value Ratio.
That is, a normal mortgage at prevailing rates, which would be advantageous.
Matt Dawson, NAB Executive of Home Ownership, had this to say:
“Home loan applications under the expanded First Home Guarantee scheme are assessed on a case-by-case basis.
“Eligible customers may benefit from competitive rates depending on their individual circumstances.”
Cotality applauded the new price caps, saying they make many more suburbs affordable to first home buyers.
Adelaide, for example, had just eight affordable suburbs under the old homes cap. Now there are 130.
Cotality economist Kaytlin Ezzy said: “While this is a demand-side policy that will undoubtedly put some upward pressure on values, it will help create a more equitable starting point.”