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Warning for first home buyers about government’s low-deposit scheme

·4-min read
Compilation image of pile of Australian dollars and row of houses in leafy suburb
The Federal government's new low-deposit purchase schemes help first-home buyers onto the property ladder. But at what risk? (Source: Getty)

First-home buyers beware: you face imminent negative equity if you take one of the 40,000 just-released places in the Federal government’s low-deposit purchase scheme.

But here’s the thing… that doesn’t mean you shouldn’t do it.

The Home Guarantee Scheme allows eligible buyers to get into the property market with just a five per cent deposit but still avoid paying the expensive lenders’ mortgage insurance (LMI).

This is accomplished by the government becoming the guarantor for the remaining 15 per cent, taking buyers up to the 20 per cent deposit required before LMI is applied.

Read more from Nicole Pedersen-McKinnon:

There is another scheme specifically for single parents, where buyers need only furnish a two per cent deposit and the government guarantees the remaining 18 per cent.

On July 1, there were a fresh 35,000 places released for first homeowners and 5,000 for single parents.

So what are the dangers?

It’s just possible that the timing is wrong.

First-home buyers may be getting into the market with tiny equity buffers as property prices may be set for further falls.

CoreLogic figures released last week show that with interest rates now rising rapidly, property prices are falling in response.

The home value index shows a second month of small national decline, 0.6 per cent, driven by steep drops in Sydney (1.6 per cent lower) and Melbourne (1.1 per cent lower) in June.

Over the financial year, prices across the country were still up 11.2 per cent. But the issue is that, in markets that have run too far too fast, the retraction is expected to accelerate.

And that’s not good if you have a freshly inked contract with a tiny deposit—your property may quickly be worth less than your debt against it.

The risk of what is called negative equity is very real.

Why would you consider it then?

The thing is, property price falls may only be temporary, as they correct for COVID-craziness and while the Reserve Bank hikes interest rates to contain inflation.

Painful but passing, if you like.

What’s more, property ‘losses’ only become a problem if you have to sell. That’s the way you ‘crystallise’ them.

If you are careful to borrow prudently – indeed you will be stress tested for 300 basis points of rate rises anyway – you should not have to.

And with the rental market so tight and expensive, you may be willing to ‘sit’ on this situation.

The fact is your mortgage repayments – even though your property may for a time become worth less on paper – could be lower than rent.

The other caveats

A further consideration is that there are a couple of dozen lenders for the First Home Guarantee scheme only, and far fewer for the Family Home Guarantee.

As such, the interest rate you can get could be far from competitive.

And if you find yourself in negative equity, refinancing may not be an option for a good while.

Even so, you may decide that you are willing to pay higher interest and sit on a paper loss.

If you buy the right property, it should – ultimately – go up.

Note these schemes are different to the proposed Help to Buy shared equity scheme (set to be income tested at similar levels to the Home Guarantee Schemes) on which Labor stood last election.

Here, the necessary deposit is just two per cent but the government will take on actual ownership of between 30 per cent (existing homes) and 40 per cent (new homes).

As such, buyers’ borrowings and exposure to property price falls are lower.

We are yet to see further details of the shared equity scheme that is proposed to begin on January 1 next year.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

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