Changes to the first home buyer low deposit scheme - has it back fired?

On 1st October, the First Home Guarantee was rebranded to the 5% deposit scheme with price caps and income limits removed by a government wanting to support more first home buyers get into the market.

The result?

According to Loan Market data, since October there has been a 40% increase in first home buyer loan applications. This spike in volume of loans being submitted is an indication of the surge in demand by first home buyers wanting to take advantage of the scheme to buy.

It raises the question as to whether the flood of new buyers applying for loans will actually cause property prices to equally rise as more young buyers try to get into the market. This would go against the objective of the government changes to the 5% deposit scheme, which now allows all first home buyers to buy with as little as a 5% deposit regardless of income or the price of the property being purchased.

Time will ultimately tell.

Perhaps a lower interest rate market will give more buyers confidence to be able to list properties which could impact supply. With the removal of price restrictions, first home buyers are also now no longer concentrated in buying a home below $600k (and the types of properties that reflected this price point). It therefore may open up a broader distribution of first home buyers across a larger price range.

Regardless, it is important that any first home buyer considering purchasing with a low deposit and the assistance of a first home buyer scheme understands the implications of setting up a loan which may be up to 95% of the value of the property they are purchasing (including costs).

It is also crucial that a first home buyer is acutely aware of what is affordable for them, not only right now, but if there are any changes in interest rates down the track (beyond the anticipated and hoped for further reduction in rates next year). Assessing capacity to repay at various interest rates can also give a first home buyer peace of mind that their loan will be affordable for them regardless of what the future holds.

Knowledge and understanding can give first home buyers confidence, regardless of what the property market may have in store.

Watch this space.