Is first homebuyer 5pc deposit for real?

SCO Mo looks set to become the ultimate sugar daddy to 10,000 young people off his $500m 5 per cent mortgage deposit scheme. Here's the lowdown on how to unpack that.

Prime Minister Scott Morrison, aka Sco Mo, set a January 2020 start for his First Home Loan Deposit Scheme - an election promise designed to get first-timers into property earlier and cheaper.

Sco Mo would become the ultimate sugar daddy, with the Federal Government stepping in as guarantor for approved applicants on "the additional loan amount taken out by the first homebuyer to cover the difference between the amount of the first homebuyer's deposit and 20 per cent of the value of the property".

Ten thousand people will be recipients of the scheme annually, just one tenth of the number of first homebuyers last year, but it will get them into their own home "years earlier than they would normally be able to do", is Scomo's plan.

Lenders mortgage insurance would also be scrapped for them - slashing about $10,000 of their start-up costs.

Mortgage Lenders Insurance would also be scrapped for the 10,000.
Mortgage Lenders Insurance would also be scrapped for the 10,000.

He calls it a game changer, but not everyone is convinced all the boxes have been ticked.

CoreLogic research analyst Cameron Kusher's concern is whether the scheme will "really help first time buyers".

"Over the past 10 years there has been an average of 103,485 first homebuyer finance commitments per annum. Given this, only around 10 per cent of first home buyers will be able to access this scheme," was his first concern.

As well, he said, "a 20 per cent deposit is not actually required to take out a mortgage".

"Buyers can borrow with less than a 20 per cent deposit. If they choose to do so, LMI is either an additional upfront cost or amortised into the mortgage amount. LMI is not transferable so if you choose to refinance or sell and purchase but still have less than 20% equity, LMI will be payable again".

But Normal credit checks would also still apply, Mr Kusher said.

"Over the past four years or so it has become increasingly more difficult to access a mortgage and borrowers participating in this scheme will still need to pass the normal credit checks."

"Given this, the scheme, as proposed, is not going to result in anyone that currently can't access a mortgage to take out a mortgage."

"What it will mean is that people that already qualify for a mortgage can potentially avoid LMI and they can also purchase with a smaller deposit."

It was positive that first homebuyers would be able to borrow with a smaller deposit and without LMI so "they can potentially own a home earlier".

But he said "from a housing affordability perspective it is difficult to see how this policy actually helps".

"If anything," he said. "it might increase demand from first home buyers and lead to higher prices within the price points that fit with maximum loan sizes which have not yet been determined."

He suggested the government look at town planning reform to boost supply by allowing higher density developments in high demand areas.

Infrastructure upgrades and rethinking inefficient taxation transactional taxes such as stamp duty could also open up new areas.

The scheme was expected to be run by the National Housing Finance and Investment Corporation with access restricted to borrowers earning less than $125,000 individually or $200,000 combined for a couple.