Federal government first-home buyer deposit scheme could leave buyers $53,000 worse off, research suggests

First-home buyers could pay almost $53,000 more to buy a property using the federal government’s 5 per cent deposit scheme than if they saved for a larger deposit, a new analysis shows.

But renters in pricey cities might be better off paying the extra money to get into the market sooner, instead of spending money on rent that could have been put towards a deposit.

Housing affordability remains a hot issue around the country, with sky-high dwelling prices still out of the reach for many despite recent falls.

First-time buyers are set to get help from the federal government, which proposed a new plan shortly before the election.

Under the scheme, buyers would need at least a 5 per cent deposit but would not have to pay lenders mortgage insurance (LMI) – a significant saving because this is usually charged to borrowers with low deposits.

But if buyers have a 20 per cent deposit they could save even more money over the life of the loan, because they would borrow less and therefore pay less in interest.

“It might mean more to some people to get into their own house sooner,” Domain research analyst Eliza Owen said on Tuesday.

“There are more intangible benefits to being in the property – a sense of safety and security.

“But in a purely financial sense, I think that $53,000 can be a large cost incurred for getting what you want sooner.”

Her research assumes an entry-level dwelling price for the combined capital cities (excluding Darwin) of $512,000 and an interest rate of 4.61 per cent, over a 25-year loan.

The total cost for a borrower with a 5 per cent deposit who had to pay LMI would be $871,103.

For a buyer who had the same deposit but no LMI, the total cost would be lower, at $845,808.

But a buyer with a 20 per cent deposit — high enough to avoid LMI — would be best off, paying only $793,102.

Over the life of the loan, the buyer with a higher deposit would save $52,706, compared to the buyer who used the government scheme.

In monthly terms, the borrower with a 20 per cent deposit would pay $2302 a month.

This would rise to $2734 for someone with a 5 per cent deposit and no LMI, and increase again to $2818 for a 5 per cent deposit with LMI.

“The main thing to consider is that the more you pay for a deposit, the less you will pay for a life of a loan,” Ms Owen said.

“[But] if the rental market you’re in is expensive or if prices are rising really rapidly, it might actually be more beneficial to get into the market sooner with a 5 per cent deposit.”

In Sydney’s expensive rental market, the $53,000 gap would buy only two years of rent for a typical apartment, Domain figures show. In Melbourne, that gap would buy 2.4 years of rent, while in Canberra it would be 2.2 years and 2.7 years in Brisbane.

So a potential buyer might spend more on rent while trying to save for a deposit than they would have paid in extra interest, meaning it would make more sense to get into the market sooner, Ms Owen said.

The flip side is that some first-home hopefuls save on rent by living with their parents or sharing a house, she says.

House price movements are another factor to consider.

When property prices are rising, the government scheme makes more sense because it helps buyers purchase an asset that will increase in value, she says.

But when prices are falling, a scheme to help buyers into the market sooner “seems counterintuitive”.

“There’s no rush to get into the market while prices are falling,” she said.