What is the First Home Loan Deposit Scheme? And how to use it?

Welcome to Finance and Fury, the Say What Wednesday Edition 

This week’s question comes from Adam

Hey Louis, learning lots from your podcast its been good value. My question is now the coalition are remaining in power i want to take advantage of the proposed first home deposit scheme. Can you explain more about this and if its good or bad and what to watch out for, and how we can be good candidates. Cheers

 

Today: Talk about coalition proposals First home deposit scheme How can you use it? What to look out for? What is it? First Home Loan Deposit Scheme The Coalition -FHLD Scheme - support up to 10,000 first home buyer loans each year 5% deposit with a government guarantee for 15% of the loan – not having to pay lenders mortgage insurance as there is 20% of loan guaranteed – your equity and Gov proposal was modelled after a similar scheme in New Zealand called Welcome Home Loan - established in 2003

Eligibility will be available to eligible first home buyers who have been able to save for a deposit of at least 5% up to 20% only be available to first home buyers below a certain capped income level which is $125,000, or $200,000 combined income for a couple who are both first home buyers. The income test would be based on the previous year’s taxable income to provide certainty The value of homes that can be purchased under the Scheme will be determined on a regional basis, reflecting the different property markets across Australia. allowing them to access a loan offered under the Scheme by a participating financial institution

Lending institution – they will give you a 95% loan The lender would still undertake the full normal credit check process on the borrower (meeting all their legal obligations) to ensure that the borrower is in a position to be able to afford the repayments. But estimates show – reduce the time taken to save for a deposit by more than five years for people living in Sydney, four years in Melbourne and three years in Brisbane The National Housing Finance and Investment Corporation will partner with private lenders to deliver the First Home Loan Deposit Scheme, prioritising smaller lenders to boost competition The Scheme will commence on 1 January 2020 and will be operated by NHFIC – what is this? Also Establishing the National Housing Finance and Investment Corporation (NHFIC) – team to meddle with housing policy First Home Loan Deposit Scheme will offer even more support with up to $500 million in the form of equity through the National Housing Finance and Investment Corporation If the borrower refinances or the loan comes to an end the Commonwealth support will terminate. Still have access to FHSSS and state stamp duty/FHO grants - superannuation to save for a deposit - Just 2,800 people so far have used that scheme – hasn’t been that effective – as it is a complicated way to save for a deposit What is the point of it? To help Australian get into the property market – the limited capacity for first homeowners to fund deposits for high prices 110,000 Australians bought their first home in 2018 - the highest level in nine years – but were coming out of GFC and drop in Syd/Melb property in 2018 roughly one-in-10 of the 110,000 Australians each year will get the Gov guarantee They don’t want to undermine the investment or residential property markets – through changes in taxation policy Taking away things from people is bad optics in politics – that is probably a major reason for Labor’s loss   Smart by the Gov for optics - doesn't cost very much (unless there are unexpected losses) But is it good for us? First home buyers, or not?

 

Look at potential Effects 

First - notice something with most policies to help affordability?

They are almost all demand side driven – looking at helping increase demand – for small pockets of people They have other policy to look at supply issues - Looking to increase housing supply – releasing suitable commonwealth land (mostly defence land) for housing development – but high residential Investing $1bn in infrastructure – National Housing Infrastructure Facility – these are good But land can be held by developers – land is released – developers buy it up – hold it and only develop when prices are up to maximise profits – so doesn’t help as much as would hope to Also – types of developments – high profits with high residential Risks to the Government – which are passed onto tax payer lenders “will still do all the normal checks on the borrowers to make sure they can meet their repayments”. But - in the event of a default the bank would need to get its money before the government – That is the way guaranteed deposits work – otherwise Gov would be a creditor of lender to you Opens up to quite a lot of risk, especially in a falling market – Gov bail outs of property prices now Risks to the buyers - Long term – cost more interest – as we will run through soon Also – chance of having negative equity in a property increases – risks of default Will it work? Looking at first homebuyers entering the market – I think it may be ineffective or actually work against FHBs Policy like most are focused on helping demand – but what occurs when demand is artificially stimulated without supply keeping up? – prices go up – so the barrier for entry is higher for the other 9 in 10 FHB Limit of 10k people – simply brings forward their purchases – it isn’t like these peple wouldn’t inevitably be able to buy – so it may cause an additional 10% p.a. to bring forward their purchases – but most of those people Real question – why did APRA put pressure on the banks to stop lending 5% to 10% deposits? The leverage risk to the economy Now the Gov steps in and is going to provide Guarantee for 15% of loan – why? The RBA is lowering rates – but needs to increase the supply of money – so something needs to soak this up to avoid hyperinflation – solution is increased borrowings attached to low risk collateral

 

Long term Effects - This policy is a double long term outcome Further downwards economic decline – Been talking for the past few weeks about that when household debt to GDP is too large – GDP growth suffers Through diversion of your personal income to repaying interest and personal debts Having an 18.75% additional loan (remember loan of 80% to 95% is almost a 20% increase) - Example - $500,000 property with a 5% deposit instead of 20% will cost an extra $58,774 over 30-year loan. the difference between a 5 and 20% deposit effects occur over 30 years On a $500,000 property - $100k deposit compared to $25k deposit - $400,000 or $475,000 mortgage $400k - a 30 year loan - pay $304,000 in interest with monthly repayments of $1956 at current rates. $475,000 – pay $363k in interest - monthly repayment of $2327, or $371 more Create a drag on the economic growth for a generation to come Potential control of the banking industry – policy that is setting up the possibility for a Government takeover of the financial system – Back in start of 2018 – had the Bail In laws – where APRA can go in and take over management of a defaulting bank Now – Lending limits for banks go up to 95% LVR for a portion of the population SECOND TEAR BANKS - Selected as they are the most susceptible - allows the gov to take over smaller banks and then to have a gov release program to the big 4 – policy of concentration of risks unto the small banks that haven’t got the capital to compete – also have lower profits as they have to offer lowest rates to compete with the big 4 Don’t see any benefit in affordability though – which is the real problem - helping price reduce – but that is bad for those with existing property – and the overall economy Nobody wants to be responsible for the drop in house prices So the solutions are to fuel demand – compounding the problem – Example – Very simple one – but hope it helps – Remember a number of years ago – Bananas were $14 a KG, cyclones, disease, ravaged banana supply – prices went up massively – What caused price drop? Increase in supply – but instead – what if Gov had put in a policy to refund 20% of your banana prices if supply couldn’t increase? Prices would be $16, $20, $25 per KG over time But there are other fruits that are close enough substitutes – not perfect – but little to substitute a home

 

Summary The first-home loan deposit scheme is likely to be popular with people on the cusp of buying their first home – competition – Golden ticket mentality – without thinking if it is right for you – Make sure you are holding the property for a while Make sure that you can afford additional interest – and are focused on paying down the loan more so than have 20% deposit as the fundamentals of borrowing are unchanged: smaller deposits mean bigger interest payments over time. Also - Good for banks - pay tens of thousands of dollars in extra interest and face larger monthly repayments

 

Sadly - Everything in place to help our property bubble along - look at the Barriers to property

Deposit size reducing – increase leverage risks Loan sizes – going up with APRAs changes, Affordability – Having a 95% loan with higher repayments, but lower rates – Risks – rates go up, prices go up beyond wages, unemployment occurs – puts households and overall economy at risk

 

This is the trifecta of plugging a dam – but at some point – you run out of fingers

the only solution to ending the affordability crisis is by boosting the supply of housing - is that it tries to fix the housing affordability problem by adding to demand for housing.

 

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