The government’s first home buyer grant or the First Home Loan Deposit Scheme (FHLDS) took effect on 1 January, allowing low to middle-income earners a chance to own their first home. But will it really?
Designed to help first home buyers enter the property market with as little as 5 per cent deposit, the FHLDS drew a lot of positive attention as it cuts the waiting time for Australians to save money for a home.
No longer do home buyers have to save at least 20 per cent of the property’s value to be able to buy a home. They don’t have to take out a Lender’s Mortgage Insurance (LMI) either. The government will do all the guaranteeing, which in money talk is 15 per cent of the usual 20 per cent deposit.
In other words, you pay the 5 per cent, the government pays for the 15 per cent, taking off the burden of coughing up enough money for a house deposit.
But will that 15 per cent really go away? Will the government really shoulder that 15 per cent and give it to you free? More importantly, will the first home buyer grant work to actually help you buy your dream house?
First Home Buyer Grant, Will It Work?
According to Eliza Owen, head of residential research for Australia in CoreLogic, the first home buyer grant may be useful, at least for those who can avail of it. For the rest, it does little to ease the problem of housing affordability.
First of all, access to the scheme is limited only to 10,000 borrowers each year. Second, saving and paying only a smaller amount for a deposit while borrowing the rest means paying more interest over time.
In First Home Loan Deposit Scheme, eligible buyers can’t be earning more than $125,000 a year ($200,000 combined for couples). Owen noted that these figures are “strangely high” and includes the top 20 per cent of full-time workers in Australia.
She said, “The scheme may actually provide more advantage to those earning towards the top of the threshold. That is because they can save a 5 per cent deposit more quickly.”
Based on a saving rate of 20 per cent of income after tax, a person earning $125,000 will take 18 months to save a 5 per cent deposit on a home with a median value of $540,974.
And someone earning $78,000 will take two years and three months, while someone earning $48,100 will have to save for three years or more.
“In reality, the savings rate is unlikely to be constant across all income levels. With the national household savings rate at 4.8 per cent, it may not be realistic that all hopeful FHBs can save 20 per cent of disposable income, especially if they are also paying rent,” Owen said.
Owen believes that it takes more than a first home buyer grant to improve ownership rates in the country and that the answer may lie in Australia having more progressive policies.
Further, Owen thinks the FHLDS is awarding home ownership to home buyers who would probably be able to buy their first homes in time anyway. And all without paying the extra and greater interest due to the low deposit.
The first home buyer grant may be good for others, but it’s not for everybody.
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