A bold move by Labor has backfired, leaving first-time home buyers in a tricky situation. The five percent deposit scheme, designed to help buyers enter the market, has instead created a financial burden for many. With the latest interest rate hike, highly leveraged borrowers are facing escalating mortgage repayments, a situation that was always a risk with this scheme.
Shadow housing minister Andrew Bragg has called out Labor's expansion of the Home Guarantee Scheme, stating it was a reckless decision. He believes the government should be transparent about the impact of the rate rise on borrowers, especially those who took advantage of the scheme.
The Albanese government's scheme allowed people to purchase homes with a minimal deposit of five percent, a far cry from the usual 20 percent demanded by banks. This meant the federal government guaranteed up to 15 percent of the loan, allowing borrowers to bypass lenders' mortgage insurance. However, this scheme had its flaws, and the consequences are now evident.
For example, a first-time buyer who took out a $1,425,000 mortgage under the scheme will now face an annual repayment increase of $2,800. This is a significant financial strain, especially considering the Reserve Bank's recent cash rate increase to 3.85 percent.
Leading economist Saul Eslake warned that the deposit scheme encouraged borrowers to take on larger debts, making them more vulnerable to interest rate fluctuations. He highlights that, by definition, the scheme required borrowers to take on more debt, thus increasing their risk.
Eslake further explains that the scheme primarily benefited higher-income borrowers, who could afford to bring forward their purchases. This, in turn, added to the demand for housing, putting upward pressure on prices in an already supply-constrained market.
UNSW economics professor Gigi Foster agrees, stating that borrowers with minimal deposits are especially vulnerable to increasing rates. She believes the five percent downpayment scheme is a temporary fix, not a long-term solution to Australia's housing affordability crisis.
Housing costs have been rising faster than the rest of the economy under Labor's watch. Since their election, housing price inflation has risen by 19.3 percent, compared to 14.5 percent for all CPI sectors. Bragg argues that Labor has failed to address the national housing crisis effectively.
The five percent deposit scheme has faced scrutiny, with the government refusing to release the treasury's modelling on its potential impact. SkyNews.com.au requested this information but received a heavily redacted version, raising questions about the scheme's true effects.
Treasury's initial forecast suggested a minimal impact on house prices, with an increase of only 0.5 percent over six years. However, subsequent modelling by Domain's 2026 Forecast Report estimated a much higher impact, between 3.5 and 6.6 percent. Bragg questions the government's delay in releasing this information, suggesting they are trying to hide the true consequences.
This scheme is just the latest in a long line of attempts to boost home ownership. Since the introduction of the first homeowner's grant in 1964, home ownership rates have steadily declined, while house prices have continued to rise. The recent monthly price surge has reignited criticism of Labor's deposit scheme, highlighting the need for a more sustainable solution to Australia's housing challenges.
