The 5% deposit scheme will help more first-home buyers from today – but the market will 'explode'

Hopeful first home-buyers Matt Hopkins and his partner Kristen Miller were pleased to hear they might need only a 5 per cent deposit to get into the property market through the federal government’s First Home Guarantee – but were then crushed to find the scheme’s income cap excluded them.

So when it was announced that the program was to be extended with raised price caps and no income limits, they were thrilled.

They have now put in an offer on an apartment and hope to fill in all the paperwork on October 1, the day the changes take effect.

“When we heard this was happening, we thought we’d wait and apply,” says Hopkins, who works in health insurance. “Being able to pay a smaller deposit meant we could add an extra $20,000 onto the price of a home.

“We’ve lived in Sydney’s Inner West for 13 years, but prices are so high here that we’re priced out of the market, which is a bummer. But we’ve been looking for a two-bedroom apartment somewhere nearby instead for around $700,000 to $850,000, so that extra money comes in very handy.”

Hopkins, 37, Miller, 34, and their four-year-old daughter Penelope are likely to be among the first to benefit from the relaunched scheme, which has also been expanded from the previous 35,000 places that avoid the need for lender’s mortgage insurance (LMI) on a 5 per cent deposit.

“Without this scheme, a 10 per cent deposit is a lot of money to have to sit and save up for young people,” says agent Aris Dendrinos from Richardson & Wrench Marrickville. “So this means they can unlock the potential to buy a property with less upfront, which hopefully will mean they can buy sooner.

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“If they can get into the market earlier, that’s key as they don’t have to wait for more years to go by with property getting more expensive all the time, and only people with generational wealth able to buy.”

The extended scheme removes income caps, previously $125,000 for singles and $200,000 for couples, and increases price caps from $900,000 to $1.5 million in Sydney and regional centres, while Victoria’s cap will rise from $800,000 to $950,000. Brisbane will rise from $700,000 to $1 million, the ACT from $750,000 to $1 million and South Australia from $600,000 to $900,000.

What once took the better part of a decade can now be achieved in just a couple of years, says Domain chief of research and economics  Dr Nicola Powell.

“Saving for a deposit has long been the greatest obstacle to home ownership. In Sydney and Melbourne, households faced timelines stretching close to 10 years. From October 1, the expansion of the First Home Guarantee reshapes that picture.”

Powell says when the changes to the scheme are applied to Domain’s time-to-save analysis (above), the difference is striking.

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“In Sydney, a household once facing more than 10 years of disciplined saving now only needs around three years – a shortcut that wipes out almost seven and a half years,” she says. “In Melbourne, the wait drops from almost eight years to just over two, erasing almost six years of effort.

“Even in more affordable markets, the scheme trims years off the journey. In Brisbane and Adelaide, first-home buyers save more than five and a half years; in Perth and Hobart, over four years.

“Put simply, the deposit hurdle has been lowered from a leap to a more manageable step.”

Others have also welcomed the expansion of the scheme. Logix Financial mortgage broker Murray Katz says he has a number of first-home buyers coming in who’d like to buy without the 10 per cent deposit.

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“The good thing about the new, revised scheme is that some of the hindrances with the old – particularly the thresholds with income and property prices – have been removed,” he says.

“In Sydney, it was difficult to find property within that permitted price range, and while it was a bit better in Melbourne, you still had some of the same issues. Now I think the new scheme will really help first-home buyers get closer to the suburbs where they want to live, instead of being forced to live much further away.”

Intelligent Finance mortgage broker Ari Bernstein says that, while it is always good to encourage first-home buyers, there are caveats.

“It’s a great thing to help people get into the market,” he says. “It enables them to buy after saving just a 5 per cent deposit. But we do have to be cautious approaching this.

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“We want to make sure that we aren’t irresponsibly having people buy who perhaps don’t have the capacity, or the will, to save the money they’ll need to service a mortgage. And by artificially creating demand, we also might be pushing prices up.”

Finch Financial chief executive Julian Finch also warns of the potential for rising prices.

“On one hand, this is good news – the removal of income caps and the increase in property price limits will open the scheme up to thousands more Australians who previously missed out,” he says.

“However, the reality is that more buyers with potentially unlimited incomes will now flood into the same price brackets, creating intense competition, which could drive prices higher and make it even harder for first-home buyers on modest incomes to get a foot in the door.

“I think we are going to see the property market explode and prices soar.”