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How will first home buyer cap affect you?

How will first home buyer cap affect you?

Jack Han investigates how the introduction of the First Home Buyers Cap next year will impact the housing market.

November 23, 2009

2010 sees the introduction of the First Home Buyers’ Cap, which forces future buyers receiving the First Home Owners Grant (FHOG) to keep under a price limit. While many will be unaffected by the cap, those who are planning on taking a larger home loan will have to look elsewhere to save.

Housing Minister Tanya Plibersek announced that states and territories will be introducing price caps to the FHOG from December 31. This coincides with the scaling back of the First Home Owners Boost on January 1, 2010, from $10,500 for existing homes and $14,000 for new homes, to just the $7000 FHOG for all first home buyers.

In 2010, New South Wales, Western Australia and the Northern Territory will place a price cap of $750,000 on homes for buyers receiving the $7,000 grant. In Victoria, the price cap is set at $600,000, and in Queensland, homes under $1 million will be eligible for the grant.

That the price cap and the completion of the Boost are a part of the overall reduction of government stimulus measures, which are no longer needed for our recovering economy.

The median house price is currently $502,000, Australian Property Monitors reported, meaning that it is unlikely the price cap will drive many buyers out of the market.

Experts such as Harley Dale, chief economist at the Housing Industry Association, have agreed that “the vast majority of first home buyers are in the market price range which is considerably below the caps.”

However, there are still concerns that some joint-buyers or big savers may miss out on the grant simply because they wished to pool resources for a bigger purchase.

Luckily for these buyers, many lenders are keen to negotiate discounted rates for loans above $750,000. For example, assuming that a buyer is borrowing the full price of the home, the difference between a $500,000 home loan and a $750,000 loan can be up to 0.1 to 0.2 percent. A 0.1 percent discount on a $750,000 loan removes $13,500 from the total cost of the loan.

With these benefits, big buyers are unlikely to miss the comparatively small grant.  However, with 171,347 Australians entering the housing market since the introduction of the government boosts in October 2008, there’s no doubt that an extra helping hand draws a big crowd.

The price cap might make bigger purchases less attractive, but many Australians refuse to be restricted when it comes to finding the perfect home. By comparing interest rates for all sizes of home loans, first home buyers will always come out on top in the price game.

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