Would you be happy to share some of the equity in your property with the government if it meant getting a foot on the property ladder? That’s the proposal called for by the Grattan Institute to assist buyers on lower incomes purchase homes.
And RateCity has crunched the numbers to discover that repayments on a mortgage of this structure may be more affordable compared to a traditional loan and to other first home buyer schemes.
The Grattan Institute has proposed a scheme to support first home buyers and older Australians re-entering the market to buy property with a deposit as little as 5%.
The government would then co-purchase the property and would take a proportional share – up to 30% - of any profits when the home was sold. Buyers would then be allowed to consider buying out the government’s equity stake in 5% increments at the prevailing market price.
The scheme has been proposed to be restricted to single applicants on incomes below $60,000, or couples with combined incomes below $90,000. The scheme is reserved for owner-occupiers.
Solving the housing affordability crisis
In an interview with the Australian Financial Review, Grattan economic policy program director Brendan Coates, said that the issue of housing affordability was a “national crisis that warrants a national solution”.
A national shared equity scheme for low-income households would “help level the playing field for homebuyers,” said Mr Coates.
Typically, home loan lenders will favour borrowers with deposits of 20%, with 10-15% also accepted in many circumstances. However, with property prices at eye-watering levels across many capital cities and regional areas, a 20% deposit could mean saving $320,000 in Sydney, for instance.
This is a tall ask for many would-be buyers, especially those on lower incomes. A 5% deposit is a far more realistic savings goal with today’s housing market values.
But the national shared equity scheme is not just for first home buyers, as “today’s younger renters are tomorrow’s renting retirees”, as the Grattan Institute noted.
Previous Grattan Institute research estimates that by 2056, just two-thirds of retirees will own their home, down from nearly 80% today.
“Even if house prices were to fall by 20% from current levels, it would still take the average Australian about nine years to save a 20% deposit on the average home,” writes the Grattan Institute.
This proposed scheme would join a number on offer for eligible buyers from the government, as well as concessions and exemptions relating to stamp duty.
It is similar to the First Home Loan Deposit Scheme (FHLDS) and the Family Home Guarantee, in that it is targeting affordability issues surrounding deposit sizes. Both current schemes are designed to support buyers who have saved a deposit of only 5% or more or only 2% or more, respectively.
The real cost of a government co-purchased property
RateCity research shows that forfeiting up to 30% equity in a property would save would-be borrowers significantly in monthly and total loan repayments.
A person buying a $500,000 property with a 5% deposit using this proposed scheme would need $82,500 less initially compared to saving a 20% deposit. This assumes that the borrower is not repaying the proposed government-owned 30% of the initial $500,000 property value.
For comparison, a person buying a $500,000 property with a 5% deposit using the FHLDS, instead of saving a 20% deposit, would need $75,000 less initially. However, over a 30-year loan term, they may pay $38,688 more in interest charges.
The person buying a home using the government co-purchasing scheme would also pay less interest over the life of the loan as they are borrowing up to 30% less from the bank. Over a 30-year loan term, this may hypothetically save you $73,506 more in interest charges than using the FHLDS.
Repayments on a $500k property – saving versus government schemes
(30% government co-ownership, 5% deposit)
|Saving a 20% deposit|
Source: RateCity.com.au, Grattan.edu.au
Note: Based on hypothetical 30-year $500,000 home loan at interest rate of 2.99%. Does not factor in fees or rate fluctuations. Figures based on initial report of proposed national shared equity scheme by Grattan Institute. Does not factor in optional buy-back of government’s equity stake in 5% increments.
- To learn more about the current home buyer schemes available to eligible customers, please read our guide.