The 5% Deposit Scheme is a doughnut saving opportunity for first home buyers across Australia. It allows them to get on the property ladder with a relatively small 5% deposit. This federal program ensures that an additional 15% of the purchase price is covered. It reduces the financial burden that is traditionally linked with a standard 20% deposit. Industry experts are cautioning that the scheme is more convoluted than it appears. Here are some hidden costs and challenges potential buyers need to watch out for.
Damian Wallace, a mortgage broker advised that the title “5% Deposit Scheme” is deceptive. He points out all of the other expenses that come with purchasing a home. These costs can add up fast and significantly impact the ability for prospective buyers to afford a home. This program stretches from $500,000 for houses in regional South Australia to $1.5 million in Sydney. It’s important to understand what denying the dangerous precedent of borrowing $1.7 trillion means.
All states and territories provide stamp duty concessions for first home buyers, but these concessions are frequently subject to caps. For example, buyers still pay full stamp duty on properties over one million dollars. Wallace points out that anyone who buys a property worth more than a million dollars has to pay the full amount of stamp duty upfront. This mandate can greatly increase the total cost of homeownership.
Damian Wallace has called for a more honest naming of the scheme, proposing that it be renamed the “95% Borrowing Scheme”. He goes on to say that opting for a lower deposit means having bigger loans. This leads to more interest payments over the long term. People making roughly $73,000 a year can only qualify to borrow between $250,000 and $275,000. By comparison, joint income families will raise their mortgage potential to a staggering $755,000-$775,000.
Under this scheme this results in large financial burdens when looking to acquire high-value properties. To qualify for a mortgage on the average $1.5 million home with a 5% down payment, you must make between $325,000-$330,000. For couples, the income needed to be between $330,000 and $335,000. Wallace gets specific, noting that doubling the same salary almost doubles your borrowing power. In fact, it more than triples, because your cost of living doesn’t increase at nearly that rate.
For a $1.5 million property, you’ll then need to come up with a total deposit of 9.5% of the purchase price. This calculation takes the higher other costs into account as well. Wallace elaborates on this point: “So that can all add up to about a $5,000 fee on top of your stamp duty. To win a competitive, $1.5 million property, you’ll likely need to have your total deposit up to about 9.5 percent of the purchase price on hand. That’s just under…
As Clare O’Neil said, for first home buyers on this scheme, you can save up to ten years towards your deposit. This historic reduction makes owning a home more affordable than ever. Wallace cautions that the plan primarily serves high-income earners. It might drive sunk costs and other hurdles to market, discouraging competitors from doing so. He argues this model is advantageous for anyone who’s able to prove to the bank that they are able to pay back the loan repayments. It’s perfect for homeowners who otherwise can’t save up a large enough deposit to get a loan at 80 percent.
More importantly, Wallace recognizes that the dynamics are shifting between who wants to buy. As he observes, these are pretty much new couples who just meet and get together. They might not have any savings but they do have a robust income. Yet he admits that identifying the right properties at an affordable price is a struggle in and of itself. Depends on whether you can get a one-bedroom … apartment … for $400,000, $500,000, $600,000,” he says.
Critics say the scheme’s lower deposit requirements have the potential to exacerbate current housing market problems. These positive impacts, they argue, might not outweigh the projected negative impacts. Barbara Pocock expresses concern that it could make homeownership more difficult for first-time buyers eager to secure affordable living arrangements alongside manageable mortgage debts. She argues, most importantly, that it will make things harder for first-time buyers. These customers are willing to take the risk of homeownership in return for a guaranteed roof over their heads and affordable mortgage debt.
