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The Coalition’s First Home Loan Deposit Scheme could not just save first home buyers many frugally spent years, it could also cost them more than $50,000 in the long run.
New research from Domain considers three of the less obvious impacts the scheme might have.
Research analyst Eliza Owen has crunched the numbers on a hypothetical first home buyer scenario. Her findings show that while the scheme is a better alternative to securing lenders mortgage insurance, it will cost tens of thousands more than a 20 per cent deposit over the life of the loan.
Here are three things to consider when evaluating the merits of the scheme.
1. Behavioural economics
Ms Owen said that behavioural economics tells us that people have a tendency to pay more to get something sooner.
She said the research suggests that average Sydney first home buyers could save almost four years and eight months with a 5 per cent instead of a 20 per cent deposit. But the flip side is that it costs substantially more.
“Using a 4.61 per cent interest rate and a price of $512,000 with a 20 per cent deposit, the total cost would be $793,102. The monthly mortgage repayments would be $2,303,” Ms Owen said.
“Under the same assumptions but with a 5 per cent deposit and where the buyer pays LMI, an added $78,000 is paid over the loan. This is because the first home buyer takes on higher debt, pays more interest and pays LMI. It also adds $516 a month to mortgage repayments.
“Even where a first home buyer takes advantage of the first home buyer deposit scheme and does not pay LMI, the 5 per cent scenario still creates an added $53,000 owed. This is because the main cost of a 5 per cent deposit loan is all the interest accumulated of debt.”
2. Dead money
Interest is dead money, Ms Owen said, but so is rent.
“So weighing up the costs of longer debt and larger interest repayments versus renting would also be a consideration,” she said.
She pointed to the LMI-free loan scenario above, where the buyer is in for an extra $53,000.
But she added the data suggests that $53,000 would buy two years of rent for a typical apartment in Sydney.
“In that scenario, a first home buyer may spend more on rent while trying to save a 20 per cent deposit, than they would in the added interest, meaning it would be better to get into the market sooner,” Ms Owen said.
“In reality, however, asking rents for a whole house or unit may not reflect what individuals actually pay in rent. Some first home buyers may boost their savings rate and minimise rental costs by living with parents before buying their first home.”
3. Capital gains count
Lower deposits generally mean more has to be paid off on the life of a mortgage, but if capital growth is high there may be a benefit in being in the market sooner, Ms Owen said.
“This is especially useful where the property is held long-term. The 26-year Domain stratified median price series shows capital city markets have delivered strong annualised returns.
“Houses have typically grown 6.5 per cent a year, and unit 5.7 per cent. A home owner with a low deposit could exceed the added mortgage costs with high capital growth.”
She said that another way to think about it is to enter a market quickly if property price growth outpaces savings.
“Comparison site Canstar demonstrated that under certain growth conditions, the cost of buying a house could be just as high, if not higher, for those saving a 20 per cent deposit, if prices have grown significantly by the time the deposit is accumulated.
“However, the flip side of this is that capital cities are currently seeing a decline in property prices, although experts are starting to call the trough of the cycle.
“But as long as prices are falling, more time saving would see first home buyers with a higher deposit and a lower entry price. Until prices start rising significantly, the current government proposal is far less relevant in helping first home buyers.”
