According to research from Cotality, the scheme’s 5 per cent deposit option may now be financially advantageous compared to waiting years to save a traditional 20 per cent deposit, particularly in high-rent cities like Sydney and Brisbane.
Since January 2020, when the scheme was first introduced as the First Home Loan Deposit Scheme, median weekly rents across Australia have surged by $200 to reach $669 per week, representing an additional cost of over $10,000 annually for renters.
The First Home Guarantee allows eligible buyers to purchase with just a 5 per cent deposit, with the government guaranteeing the remaining 15 per cent to reach the standard 20 per cent threshold, eliminating the need for costly lenders’ mortgage insurance (LMI).
Eliza Owen, Cotality Australia Head of Research, said that while a smaller deposit means higher interest costs over the loan term, the savings on rent can outweigh these expenses in many cases.
“Over the life of a 30-year loan, the extra interest costs can be tens of thousands, or hundreds of thousands more expensive than a 20 per cent deposit home loan,” Ms Owen said.
The analysis reveals that in Sydney, using the scheme could reduce the time needed to save a deposit by approximately six years, potentially saving buyers around $251,000 in rent payments at the current weekly rate of $801.
When comparing the additional interest cost of a 5 per cent deposit loan against potential LMI and rental savings, the research indicates that purchasing at the maximum price cap under the scheme often works out better financially than remaining in the rental market to save a 20 per cent deposit.
The benefits vary significantly by location.
In Sydney, where the scheme’s price cap is $1.5 million, the additional interest cost of $234,909 is offset by potential rental savings of $251,161 and LMI savings between $56,000 and $80,000.
Brisbane and Adelaide also show substantial net benefits, with potential savings of up to $59,239 and $66,668, respectively, when factoring in reduced rental costs and avoided LMI.
However, the advantage is less pronounced in markets like Darwin and Canberra, where the upper bound of savings is estimated at just $18,555 and $15,971, respectively.
The federal home guarantee schemes have already helped over 168,000 eligible buyers into homeownership since inception, but Cotality notes that the expansion of the scheme’s places, price caps, and income thresholds will likely boost demand.
“With expansion of the schemes’ places, price caps and incomes, there will almost certainly be a short-term boost to home values up to the threshold of the scheme, coinciding with interest rate falls and tight levels of housing supply,” Ms Owen said.
“While individuals on the scheme could leap over the deposit hurdle faster, this policy is ultimately a demand-side stimulus which fails to address why deposits – and now rents – are so unaffordable in the first place.”
