Don’t let the PM or the Home Guarantee Scheme persuade you to buy too soon

Asked what renters should do to about the enormous increases in housing costs, Prime Minister Scott Morrison had this advice last week: ‘Buy’.

Right. Next problem.

Of course, he copped a lot of flak for the flippant comment.

With climbing cost-of-living expenses and interest rates likely to rise, now is not the time to over-extend.Credit:Melinda Houston

But let’s take a deep dive into what the Coalition believes will help first-home buyers, and some others, onto the property ladder: the Home Guarantee Scheme.

Now-three-pronged, places were lifted from 25,000 to 50,000 in last week’s budget.

This doubling of the numbers applies for the next three years, after which it will drop to 35,000 as an ongoing measure.

Note upfront that a massive 150,000 first homes were bought in 2021. So the Home Guarantee Scheme may fill fast.

All three iterations allow people to purchase before they have saved the 20 per cent deposit necessary to avoid lenders’ mortgage insurance, which can also cost tens of thousands of dollars extra.

Measures are for owner-occupiers only, and eligibility is income-tested. Singles must earn below $125,000 per annum and couples must make $200,000. The test applies to your taxable income the financial year before application.

The three opportunities in the scheme are:

The First Home Guarantee

At 35,000 guarantees a year from July 1 (20,000 before the budget), first-home buyers can purchase a new or existing home with a deposit as low as 5 per cent.

To make this happen, the government guarantees the 15 per cent necessary to take the ‘deposit’ up to 20 per cent.

There is also a value cap on what you can buy. And in a hot and high market, this is where the issues may start.

In Sydney, an existing house or unit must cost $800,000 or less, which cuts out an awful lot of locations. In fact, analysis by CoreLogic shows only 14.6 per cent of suburbs in Greater Sydney would fall into the buying band in 2021/22.

The same is true in Melbourne. At a limit of $700,000, just 20 per cent of locations would qualify.

The situation is the worst in Greater Hobart, at $500,000, where 8.5 per cent of places would be in play and the ACT, also at $500,000, where it would be a mere 1 per cent. CoreLogic says Adelaide ($500,000) has a choice of areas of 16.4 per cent.

In more affordable Brisbane ($600,000), Perth ($500,000) and Darwin ($500,000), 34 per cent, 35.9 per cent and 42.9 per cent are an option, respectively.

Although it looks as though Labor will support the scheme, it has said the price caps are too low.

The Regional Home Guarantee

This one was new in the budget, and is designed to increase new housing stock and help mitigate the huge rises in home prices in the regions, as droves of city dwellers – liberated from their offices by the pandemic lockdowns – opt for sea- and tree-changes.

A 5 per cent deposit will be enough to build or buy a newly built property, and you don’t have to be a first-home buyer this time, but simply someone who has not owned a property for five years.

From October, there are planned to be 10,000 places for this. Price caps are lower than in the capitals.

The Family Home Guarantee

Announced last budget, this is a version of the scheme specifically aimed at single parents, for whom it is often difficult to get a loan across the line.

The first 5000 successful applicants can get into the market with just a 2 per cent deposit, with the scheme guaranteeing 18 per cent.

Concerns

Remember, the government does not actually chip in 18 or 15 per cent for your property. It only ‘backs’ your loan to that extent to exempt it from lenders’ mortgage insurance.

Just a 2 per cent deposit – or even a 5 per cent one – does not give you much of an equity buffer if property prices subsequently dip below what you pay.

Property has begun to retract in Melbourne and even in Sydney, while in many regions the market is still, well, insane.

But falling demand, anywhere, usually leads to falling prices.

That’s fine if you can hold through a downturn and don’t become a forced seller in a position of owing more than you own, or in negative equity.

Which all comes back to having sufficient income into the future to meet your repayments.

With interest rates also likely to rise, now is not the time to over-extend. No matter what the Home Guarantee Scheme allows.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook https://www.facebook.com/NicolePedersenMcKinnonMoney, Twitter https://bit.ly/2QsX0OO and Instagram https://www.instagram.com/nicolepedmckmoney/channel/?hl=en

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