First home loan scheme could lead to more withdrawals than deposits

The federal government’s First Home Loan Deposit Scheme (FHLDS), which is due to commence on 1 January 2020, has generated a mixed reaction from property and finance commentators.

The FHLDS is an Australian Government initiative to help some first home buyers (FHBs) purchase a home sooner. It does this by providing a guarantee that will allow eligible first home buyers on low and middle incomes to purchase a home with a deposit of as little as 5 per cent.

First touted by the government when property prices had slumped, the scheme will provide obvious benefits to the relatively few borrowers with access to it but has been subject to criticism that it does too little, for too few, and is possibly too late.

The scheme is capped at assisting just 10,000 FHBs per year get onto the property ladder, requiring the smaller deposit yet still giving them access to competitive interest rates and waiving the need for lender’s mortgage insurance. The government has agreed to guarantee the difference between the borrower’s 5 per cent deposit and the standard 20 per cent deposit required to take out a home loan without paying insurance.

Finance broker Richard Morgan, of Freedom Funding in Sydney, said the scheme had some merits but was conceived when the property market was in a different phase.

“During the national election when the Liberal Party announced the introduction of this scheme we were in a completely different market with low clearance rates and property prices in decline,” Mr. Morgan said.

“Without doubt there will be some people that will be able to benefit from the scheme, but I think it will just add more fuel into an overheated market in the short term.

“For those that don’t end up with a spot on the scheme, it will only exacerbate the affordability issue further,” he said.

The scheme imposes a range of price limits on the properties borrowers can purchase. They range from the top tier, in Sydney, with a price ceiling of $700,000 and requiring a minimum $35,000 deposit, to regional South Australia with a ceiling of $250,000 and a subsequent deposit of $12,500.

The chosen ones

The National Housing Finance and Investment Corporation (NHFIC) recently announced its full panel of lenders that will have the ability to write loans for first home buyers (FHBs) as part of the FHLDS.

National Australia Bank and Commonwealth Bank have been chosen as the two major lenders for the panel, along with 25 other non-major lenders.

The two major banks will be allowed to issue no more than half of the 10,000 annual guaranteed loans per financial year, as specified in the NHFIC Investment Mandate. The other 5,000 loans will be written by the non-major participating lenders (see list at end of the article).

Many of the smaller and regional lenders taking up the combined 50 per cent of the loans are not members of their aggregator’s panel – and therefore brokers would not be able to write loans to these lenders unless they directly accredit with them.

“Having a strong representation from these smaller regional lenders will help effectively spread the benefit of the scheme both geographically and in supporting the business of these smaller lenders,” said Mr. Morgan.

“With some of these lenders not being on aggregator/broker panels, it means it may be challenging for brokers to help play a role in the implementation.

“The key for these smaller regional lenders will be leveraging their own communication direct to the customer and educating them that the scheme is available and that they are able to provide their customers with a potential competitive advantage.”

Speed v costs

Borrowers looking to access the loan scheme would benefit from performing their own research into the long-term costs of cheap finance, even that guaranteed by the government.

Analysis by research agency Canstar shows the average first home buyer will take just over five and a half years to save a 20 per cent deposit for a $400,000 home if they are putting away 20 per cent of their weekly income each week.

The FHLDS five per cent deposit cuts that time by a whopping four years and three months.

The hastened purchase seems like the no-brainer option, saving time and getting buyers into the market ahead of the projected price increases in most capital cities.

But things are rarely that simple in the world of property finance. The Canstar analysis also reveals someone buying a $400,000 home with a 5 per cent deposit would likely pay more than $62,000 extra in interest over the life of the loan than if they had a 20% deposit.

Canstar’s finance expert, Steve Mickenbecker, highlighted that while the initiative will mean borrowers can get into the property market sooner, a larger loan will mean higher repayments and more interest paid over the life of the loan.

“Borrowers will still need to qualify for the loan, proving they can make repayments.

“The best way to demonstrate the ability to repay a loan is via a sustained savings program, though in this case first home buyers will have to establish they’re in a position to make future repayments, as they’ve not proven a savings habit with only a 5 per cent deposit,” he said.

“The cap at 10,000 loans means there will be pressure to get in early to avoid the alternative, which is lender’s mortgage insurance that can be costly.”

Freedom Funding’s Mr. Morgan reinforced the latter point.

“In 2018 we had around 110,000 first home buyers get into the market, so only having 10,000 applications will mean there is not a widespread benefit for many.”

“I think in the price brackets that the scheme is eligible for we’re going to see increased competition and upward pressure on prices as a result, as first home buyers all rush to secure the limited spots as quickly as possible.”

Major banks get headstart

For opaque reasons seemingly known only to the NHFIC, the two major banks will begin taking applications from FHBs for loans under the scheme from 1 January 2020, with most other lenders taking in their first applications as of 1 February.

NAB Chief Customer Officer Consumer Banking Mike Baird said the scheme is “a fantastic way of helping even more customers, allowing them to potentially save thousands of dollars on their mortgage.”

Mr. Baird said NAB was the only major bank to have a special rate for first homebuyers – currently 2.88% p.a. fixed for two years.

Commonwealth Bank Group Executive Angus Sullivan said: “initiatives like the FHLDS could potentially save customers thousands and help them enter the property market sooner.”

“The scheme will complement our existing home loan offering including our competitive products and services, including a two and three year 2.99% fixed rate for new and existing customers,” Mr. Sullivan said.

The non-major participating lenders: Australian Military Bank, Auswide Bank, Bank Australia, Bank First, Bank of us, Bendigo Bank, Beyond Bank Australia, Community First Credit Union, CUA, Defence Bank, Gateway Bank, G&C Mutual Bank, Indigenous Business Australia, Mortgageport, MyState Bank, People’s Choice Credit Union, Police Bank (including the Border Bank and Bank of Heritage Isle), P&N Bank, QBANK, Queensland Country Credit Union, Regional Australia Bank, Sydney Mutual Bank and Endeavour Mutual Bank (divisions of Australian Mutual Bank Ltd), Teachers Mutual Bank Ltd (including Firefighters Mutual Bank, Health Professionals Bank, Teachers Mutual Bank and UniBank), The Mutual Bank and WAW Credit Union.