‘Pie in the sky’: You can’t buy a $1.5m home on a 5 per cent deposit

A full-time worker on an average wage would not be able to borrow enough money to take full advantage of the federal government’s first home buyer help, instead falling hundreds of thousands of dollars short.

From October, first home buyers on any income are eligible to use the First Home Guarantee scheme and purchase with a low 5 per cent deposit. The property price caps for the program will also be increased and the number of places in the scheme will be uncapped.

Prime Minister Anthony Albanese this week told ABC Radio it would make an “enormous difference” to make the 5 per cent deposit scheme available to everyone with higher property price caps.

But home buyers must qualify for a loan from their bank, and lending rules have not changed.

A full-time worker earning the average annual wage for NSW of $106,997, based on ABS figures, could afford to borrow a maximum of $560,000, Canstar modelling shows.

Buyers using the scheme in Sydney can purchase a home worth up to $1.5 million. But with a loan of $560,000 and a 5 per cent deposit of $75,000, this buyer would be left $865,000 short of the maximum purchase price.

A Victorian worker earning the average full-time annual wage for that state of $102,179 could afford to borrow $527,000, on Canstar modelling.

Melbourne buyers can purchase a $950,000 home, which would require a 5 per cent deposit of $47,500. But without being able to secure a larger home loan, this buyer would be $375,500 short.

If the Melbourne buyer found a partner paid the same amount, they could borrow $1,054,000 together and would be able to buy the maximum property using the scheme.

But even if the Sydney buyer coupled up, they could together borrow a maximum of $1.12 million. Combined with a 5 per cent deposit, they would be left $305,000 short of the maximum purchase price.

“Just because the government says you can buy a property as much as $1.5 million doesn’t automatically mean that’s the property price you should be aiming for,” Canstar’s data insights director Sally Tindall said.

“Based on these figures, a couple both earning the average full-time wage probably aren’t going to be able to borrow enough to buy a $1.5 million house with a 5 per cent deposit. However, a couple on a slightly higher wage will,” she said.

She said the purpose of removing income caps, uncapping the number of places and increasing property price limits was to make the scheme more inclusive for first home buyers in different circumstances. Some might have a 15 per cent deposit, others might be on an above-average wage.

“It’s incredibly tough out there for people on a huge range of different incomes,” she said, noting the high level of property prices now.

But she said banks would still assess whether borrowers could afford their repayments.

She encouraged borrowers to understand the consequences of taking on a loan for 95 per cent of the property, such as whether it pushed their interest rate higher, how much their monthly repayments would be, could they maintain an emergency buffer, would it affect their chance of refinancing and the risk of negative equity.

Mortgage broker Rebecca Jarrett-Dalton backed the First Home Guarantee scheme, but said many first home hopefuls had even more modest financial situations.

A recently graduated nurse earning closer to $80,000 with a HECS debt may have a borrowing capacity closer to $412,000, she said, making it hard to afford even a unit.

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“It doesn’t mean they can borrow as much as they need to borrow,” she said. “If you’ve got those higher incomes that can get you to the higher purchase price, you’ve probably got capacity to save, unless you’ve been paying higher rent.”

Moderate income earners may need to make some compromises on the type of property or suburb they hope for, but overall she described it as a “fabulous scheme” that had helped most of her first home clients, albeit at a more modest price point so far.

“The $1.5 million is pie in the sky for a lot of people and I think the problem we have is properties will jump just as much in value.”

AMP deputy chief economist Diana Mousina thought the price caps had been increased to be more in line with today’s median home prices.

She thought the scheme would push property prices modestly higher, albeit more than Treasury has modelled, amid a rising market and falling interest rates.

“The scheme, it doesn’t solve any of the longer-term affordability problems,” she said.

“In Australia 50 years ago, the home price to income ratio was at a much more sustainable level of four to five times … Now it’s more like 10, 11 years.”