Are you confused about the deposit guarantee being promised by Liberal and Labor this week? If you’re not you should be and if you’re don’t worry.
Both parties, yes both so don’t go voting for either based on this deal alone, have now promised to carry out this debt guarantee. To summarise, the government will be a true friend to the first home buyer and reduce the time you’ll need to save for a deposit….
That’s the sales pitch anyway. The reality is while this scheme can certainly be a useful tool for a first home buyer, whether it’s good or not will be completely the responsibility of the buyer.
Let’s break down a few points first. Starting with your deposit and how it affects your risk.
When you buy a home your deposit is the money you put into your purchase. The rest is the banks. The bank therefore owns the majority of your property at acquisition. Their ownership stays at a dollar figure while yours is a percentage.
As I’ve talked about in my other videos MANY first home buyers go for new homes, they receive better incentives and it’s always an attractive prospect to have a nice new home if you can afford it. This leads many buyers out into areas of high affordability in search of newer bigger homes and since build prices don’t vary much this pushes them into areas with very low intrinsic location or land value which are also oversupplied with new housing.
These areas and many others for varying reasons to not always rise in value in line with the Perth average. They can suffer from long periods of stagnant or even negative growth after they are built as newer stock devalues them and existing stock is depreciating with building value and all the infrastructure is already built, there’s no room for improvement. often within a 1-5 year period an unlucky first home owner or one who didn’t research the area they bought in can lose their deposit or a large chunk of it at least. This reduces or removes their ability to refinance, negotiate better rates or move to a new home if they wanted to.
If your house goes down 5% and you have a 20% deposit you’ve lost a quarter of your equity. If you only have a 5% deposit the bank will now own more of the house, then they deem it’s worth. Your options for sale, refinance or anything to do with your mortgage are pretty much gone at that point. Having trouble paying the mortgage or Need to renegotiate lower repayments? maybe an interest only period while you get back on your feet? If the bank sees your home as a risk your options are going to be limited if any at all.
so why is the government doing this. Well it may have something to do with trying to stimulate the receding property markets with new home buyers. This plan will push thousands of home buyers into purchasing soon after its implemented. This will immediately benefit the building industry and help grow sales in New housing areas.
Now to the main question is it good or bad? It’s both. Key start and other buyer assistance schemes already facilitate low deposit lending to first home buyers, so this isn’t anything new, but it certainly looks to be more available. where Keystart is a single lender with strict criteria this scheme can be applied through many different lenders. Many of them smaller lenders it seems. This scheme if used in conjunction with smart, considered and researched buying will be a great solution to many home buyers looking to get their foot in the door. But it SHOULD come with a warning that buying with a 5% deposit is a huge risk. I expect to see many first home buyers who have not given this the proper thought getting stuck in their first home for far longer than they had planned. In some cases, they may even lose those homes.
But as we always say, do your research and make sure you have the support you need to make an informed decision when buying your first home