‘Help to Buy’ vs ‘First Home Guarantee’ — how they stack up

Would you want to own a house with the Government?

The Federal Opposition has announced that, if elected, it will help more low- to middle-income earners onto the property ladder by buying a stake in their new home.

Under the ‘Help to Buy’ scheme, the government would assist people earning less than $90,000 a year ($120,000 for couples) purchase a property by stumping up to 30 per cent of the purchase price for existing properties and up to 40 per cent for new builds.

The scheme is capped at 10,000 places per year and it’s for first home buyers or anyone who lost a home because of, say, a divorce.

Obviously, there will be price caps per city and region, with the Sydney and regions’ cap being $950,000.

As with the Coalition’s Home Guarantee Scheme, eligible homebuyers will avoid the need for lenders’ mortgage insurance.

Under Help to Buy, eligible homebuyers would pay a 2% rather than a 5% deposit.

Borrowers would not pay rent on the portion of the property the government owned.

However, when the property is sold, the government would get back its equity, plus any capital gains on its portion of the home.

To apply, borrowers need a minimum 2 per cent deposit and must be able to prove they can afford the remainder of the mortgage.

They wouldn’t be required to pay lenders’ mortgage insurance and don’t need to be a first home buyer but can’t own property at the time of purchase.

First Home Guarantee scheme (Liberal) vs Rent to Buy scheme (Labor)

	Home Guarantee scheme	Rent to Buy scheme
Deposit required	5% for first home buyers, 2% for single parents.	2%.
Places per year	35,000 for first home buyers 10,000 for regional buyers 5,000 for single parents.	10,000 (also providing 10,000 places for the Regional First Home Buyer scheme)
Who’s it for?	First home buyers, single parents, people moving to regional areas.	Anyone who doesn’t currently own property.
Annual taxable income	Up to $125,000 for individuals, $200,000 for couples.	Up to $90,000 for singles, $120,000 for couples.
Lenders’ mort. insurance (LMI)	No.	No.
Property price cap in capital cities	Sydney – $900,000 Melbourne – $800,000 Brisbane – $700,000 Perth – $600,000 Adelaide – $600,000 Hobart – $600,000 Canberra – $750,000 Darwin – $600,000	Sydney – $950,000 Melbourne – $850,000 Brisbane– $650,000 Perth – $550,000 Adelaide – $550,000 Hobart – $550,000 Canberra – $600,000 Darwin – $550,000
Pros	Get into the market sooner without having to pay LMI. Stop paying rent. Benefit from 100% of the capital growth.	Smaller loans, smaller monthly repayments, less interest. Stop paying rent. More likely to be approved by the bank. Get into the market sooner without having to pay LMI.
Cons	A larger loan means higher repayments and increased impact of rate rises. Pay more in interest over the life of the loan. Limited buffer with just 5% equity.	Reduced benefit from capital growth. The scheme is capped at just 10,000 places. Limited buffer with just 2% equity.

Shared ownership isn’t new

The United Kingdom has offered such a scheme for decades, as do state governments in Western Australia (Keystart), South Australia (HomeStart) and Victoria (Homebuyer).

The report commissioned by Howard in 2004 found shared ownership “as critical to the welfare of Australian families today as was the emergence of the mortgage market at the turn of the last century”.

A report produced by the Grattan Institute in 2022 found that while it might cost the government money in the short term, it might save money on rent assistance longer term if it got more Australians into homeownership.

Despite many attractive features, shared ownership has remained niche worldwide due to its complexities. In the UK, fewer than 1% of households use it.

Sydney example – buying a $900,000 existing property in August of this year (note Help to Buy goes up to $950K).

	Home Guarantee scheme (first home buyer)	Help to Buy scheme
Property price	$900,000	$900,000
Deposit	$45,000	$12,600
Loan size	$855,000	$617,400
Repayments (Aug 2022)	$4,028	$2,909
Repayments 1 yr later	$4,527	$3,269
Prop. of capital growth	100%	70%

RateCity.com.au research director, Sally Tindall, said:

Under this scheme, Australians would still be buying at inflated prices, however, the government would be taking on a larger share of the load and the risk.

This new proposal reduces two major barriers for first home buyers: deposit size and how much the bank will lend them.

A smaller loan means smaller, more manageable monthly repayments.

A smaller loan will also help limit the strain on people’s monthly budgets when interest rates start rising.

That said, taking out a loan with a 2 per cent deposit can still be risky, particularly if borrowers have nothing left in reserve.

Rooves leak, hot water systems burst, and interest rates can go up.

Regardless of how you get into the property market, make certain you have money in the tank to deal with any curve balls that come your way.

While this policy could put upward pressure on property prices, with just 10,000 places targeted at low- to middle-income earners, any pressure would be limited.

The bigger issue of skyrocketing prices is likely to be eased by rising interest rates.

Property prices are expected to drop, potentially by up to 15 per cent in some areas over the next couple of years.

Anyone with a 2 per cent deposit could fall into negative equity in the blink of an eye, although with a smaller debt, they might find it easier to ride out any storms.

The fine print for this scheme will tell the full story.

The rules around who can live in the property, how, when and how much it will cost to buy more equity, and how long the borrower might be tied to one lender are important questions that still need to be answered.

So often, the devil is in the detail.

ALSO READ: 9 tips to help first home buyers enter the property market