Good intentions, big limitations: What experts really think of the First Home Loan Deposit Scheme

All the initial places in the federal government’s First Home Loan Deposit Scheme have been snapped up, as new borrowers rush to take advantage of record-low interest rates and the renewed vigour in the property market.

The first 3000 scheme positions released to National Australia Bank and the Commonwealth Bank have already been reserved, according to spokespeople from both banks.

A NAB spokesperson said: “We have a customer waitlist for positions as they become available. We continue to work with the National Housing Finance and Investment Corporation as it makes a further 7000 places available from 1 February.”

Of those spots, 2000 places will be shared between NAB and CBA. A further 5000 loans will be made available through smaller lenders.

Good intentions, big limitations

Despite the FHLDS’s popularity, experts point to its limitations. “The scheme has good intentions, in that it is designed to help people get the deposit together they need to buy their first home,” says financial services firm Pitcher Partners’ client director, Jason Fallscheer. “It can take years to save the deposit even for a modest property.”

“But there are a few big limitations. It’s only available to 10,000 people [each financial year], the caps on housing prices are very low, and there are some issues around equitable access for couples. It also doesn’t address some of the big challenges to purchasing for people who don’t fit the narrow first-home buyer demographic.”

Jane Slack-Smith, director of Investors Choice Mortgages, who is otherwise a fan of the scheme, agrees the property price caps are limiting. “The people we’re talking to are saying the caps are way too low.”

The scheme has an income limit of $200,000 for couples and $125,000 for singles. There are also are price limits of $700,000 in Sydney and $600,000 in Melbourne, which reflect the median property prices in those capital cities. Other cities and regional centres have lower caps.

Income limits are also an issue. An income limit of $125,000 for a single means that they couldn’t purchase a property at $700,000 in Sydney, because they wouldn’t have the income to support a loan based on a five per cent deposit.

The basis of the scheme is that borrowers can purchase a property with a five per cent deposit and not have to pay lender’s mortgage insurance, which is covered by the government. LMI typically adds an extra $10,000 to $15,000 to the cost of borrowing.

This scheme differs from the national First Home Owner’s Grant scheme, which uses federal government money administered by the states. “The amount available under the grant changes depending on where you are,” Fallscheer said. “Some states limit it to new homes or vary the grant depending on where you buy. But in most cases, it contributes between $10,000 and $20,000 towards buying your first home.”

Fallscheer notes the scheme has several unusual elements. “It’s operated on a first-come, first-served basis,” he said “People who have already saved at least five per cent deposit are in a good position. But those who are still saving towards that threshold will struggle.”

“It also defers costs. On one hand, borrowers don’t have to save as much in a deposit to take out a loan. But they need to borrow the amount they otherwise would have saved.”

“Instead of saving $120,000 and borrowing $480,000 for a $600,000 house, you might only need to save $30,000. But your home loan will be $570,000 — and you are paying interest on the higher amount.”

Rising house prices in a low-interest rate world could also present issues. Low-interest rates typically mean higher prices, which is a problem for first-home buyers because they have to save more for the deposit.

The extra 10,000 buyers in the market could also raise prices for properties that are within the scheme’s price limits over the next three months. As such, sellers are likely to get a good result because of more competition for properties.

Another potential problem is that in the rush to secure a property, buyers may make ill-informed choices. “People may not make well-researched decisions on where to buy,” says Slack-Smith.

This could cause problems down the track when the froth comes out of the property market. Some first-home buyers may find it hard to achieve a capital gain in the short-to-medium term. Only time will tell.

• Buying your first home? Read Domain’s ultimate guide for first-home buyers to find out where to start