Buy with a 5% deposit: Labor’s promise to all first-home buyers uncovered

Under a re-elected Albanese government, all first-home buyers will be allowed get on the ladder with just 5% deposit, while also avoiding Lenders' Mortgage Insurance (LMI). It is an expansion of its existing scheme, which was formerly income capped.

The announcement over the weekend comes less than three weeks out from the federal election and is part of a raft of housing measures the current government has announced in a bid to win over young voters.

“The announcement to boost placements and recalibrating the median national purchase prices under the Home Guarantee Scheme will get more first home buyers into a home sooner,” Housing Industry Association managing director Jocelyn Martin said.

“Saving a deposit is one of the most significant barriers to getting first home buyers into the market.”

Under the new scheme, a first home buyer in Australia’s most expensive city, Sydney, could buy a $1,000,000 apartment with a deposit of just $50,000.

The scraping of LMI for first home buyers has been particularly welcomed by the HIA.

“LMI doesn’t provide a benefit to first home buyers, it is to protect banks,” Ms Martin said. “Mortgage arrears in Australia remain exceptionally close to zero and has remained at those levels for decades.

'What is LMI?': youtube.com/mortgagechoice

“There is an opportunity to lower the cost of borrowing for a first home buyer without systemic risk to the financial system.”

Risky business for lenders

Low-deposit home loans for all first-home buyers, while positive to those who would benefit, could cause issues such as limiting competition in the lending market, the Insurance Council of Australia (ICA) warns.

"By subsidising all first-home buyers, including those with a good income and savings in the bank, the purpose of the First Home Guarantee scheme is lost and a functioning private market may be severely and irreversibly impacted,” chief executive Andrew Hall said.

LMI – first introduced in 1965 – is “critical” to Australia’s housing market and healthy lender competition, the council added.

“Effective nationalisation of the LMI market for first home buyers as proposed will have the effect of reducing the pool of LMI customers so significantly that the market may become unviable, making it harder for those who are not included in the government scheme to access finance,” it said in a statement.

Finance Brokers Association of Australia managing director Peter White agreed “a word of caution” on the 5% plan is crucial.

“While it is a positive move, there are complexities that may impact the ability of lenders to provide these loans to all applicants,” he said. “Lenders need to meet responsible lending obligations and a deposit is evidence of the borrower’s ability to service the loan.

“Further impacting a lender’s ability to provide low deposit loans that are part of a government-backed scheme is their capacity to securitise their mortgage portfolio. This need may result in lenders capping the number of this type of loan they are willing or able to provide.”

The ICA said Labor should instead focus the Home Guarantee Scheme on those in most need including single parents, essential workers and key workers in the regions.