Amidst the crazy election furor, annoying political ads and badly-thought-out vote grabs, one of the latest knee-jerk ideas of our politicians is to assist a limited number of eligible first home buyers into the market with a handy additional 15% deposit guarantee.
What does this mean for buyers?
It means that those who haven’t saved more than 5% can enter the market and avoid the cost of Lender’s Mortgage Insurance.
Could it skew the market? Yes
It is good for banks? Potentially no. It’s a higher risk and could possibly allow less visibility on credit conduct and borrower-risk without the heightened checks that the mortgage insurers usually apply.
Is it good for buyers? I’d argue not. If this market is skewed, the buyers could find themselves pushing up asset values in their quest to claim the incentive.
As a lovely repeat client said to me today when describing a friend who indulged in too many cocktails and shoes, “my friend is the classic ‘Sex and the City’ buyer. Remember when Carrie realised in her late thirties that she’d spent all of her savings on fashion and cosmopolitans?”
“At four hundred dollars a pop, you have…. how many?…. twenty?… fifty?… A hundred pairs of these shoes? Well, there you go. Four hundred times a hundred is forty thousand dollars, Carrie. That’s your down-payment right there.”
Buyers who have a 20% deposit avoid the need to take up Lenders’ Mortgage Insurance (LMI) which is an additional and sizeable amount usually added to the loan amount and amortised over a 25 or 30 year period. For those who find the 20% figure too much of a stretch, or for those who place a value on getting into the market more quickly, the option to take on LMI certainly exists. LMI is calculated on a sliding scale and for a $600,000 loan with a 10% deposit, Genworth calculates an estimated LMI surcharge of $13,176.
As sizeable as this is, when capitalised over a thirty year loan term, the repayment figure per month for the LMI component on a P&I loan at 4.5%pa is just under $67 per month.
The important thing to note about the opportunity that LMI presents is saving time.
A buyer who would ordinarily take several years to save the additional $60,000 for such a purchase can enter the market sooner, and in a positively trending market, the cost of the LMI premium could be shadowed by the capital growth that the buyer would face in the 20% deposit scenario.
For example, if the capital growth sits at 5% per annum for the asset, a three year savings regime could see the same asset priced at $694,575 three years’ later. Without the LMI, the buyer’s additional monthly repayments for the same asset three years later could be considerably higher than the $67 per month.
Lenders Mortgage Insurance enables buyers to get onto the property ladder earlier, but it represents a higher risk too.
Instant gratification? No, not quite, because it does require the buyer to save at least a 5%, (and for some lenders, 10%), but the risk of overcapitalisation, (ie. spending more than the value of the property) can strike if the asset value diminishes.
My concern with the recent First Home Buyer Deposit Scheme is broader than risk. With $500,000,000 taxpayer dollars at risk, the question remains; is this the best initiative our governments can muster?
Back in 2015 when our Melbourne and Sydney property prices were growing on a sharp trajectory, our First Home Buyer segment was justified in feeling pushed out of the market. Auction clearance rates were high, investor competition was tough, and this contingent really needed a helping hand.
When our State Governments increased the stamp duty concessions in both states and for eligible buyers up to $600,000 in Victoria, and $650,000 in Sydney, the ability for FHB’s to increase their borrowing capacity substantially was reflected in the two speed market that followed.
I’d argue that the market conditions have improved somewhat for our first home buyers since this incentive was introduced. While lending is still scrutinised and obtaining finance is a constant challenge for most, first home buyers still do hold the upper hand when it comes to how they are assessed. With (typically) less other debt and lower servicing than other borrowers face, we really do need to ask the question of our politicians.
Is this the right initiative for our taxpayer dollars to fund?
Images credited to Kyle Parker Youtube, Metro and Genworth