RBA reveals FHB deposit scheme calculations

The $500-million scheme is designed to provide first home buyers (FHBs) earning up to $125,000 ($200,000 for couples) with “a significant leg up” by making available to them 95 per cent loan-to-value ratio mortgages.

The Liberal Party suggested that this would help borrowers save up to $10,000 by removing the need for them to take out lenders mortgage insurance (which is generally required for those borrowing more than 80 per cent of the property value. 

In effect, the scheme will see government guarantee the difference between the borrower’s deposit (minimum 5 per cent) and the 20 per cent deposit usually required.

As part of the proposal, which is set to commence from 1 January 2020, the government said it would partner with private lenders and prioritise smaller lenders in a bid to “boost competition”.

While the scheme was initially welcomed by industry, there have been some concerns raised over the scheme’s reach and efficacy in addressing housing affordability.

Following a freedom of information (FOI) request to the central bank for “research or analysis of the federal government's proposed First Home Loan Deposit Scheme” since 1 March 2019, the RBA has now released a chain of emails outlining their calculations on the scheme’s impact.

The FOI document released is an email chain between RBA manager for institutional markets, Eden Hatzvi, and several RBA colleagues outlining that the “various caps” on the scheme, such as being offered to the first 10,000 qualifying home buyers.

“The various caps on the scheme (10,000 loan cap, income and house prices) are likely to be the binding constraint on the amount of loans provided rather than the scheme’s equity funding,” the RBA manager for institutional markets wrote.

The email went on to provide the following analysis:

“Based on ABS numbers, in the year to February there were 110,000 loans to first home buyers. The average loan size in February to FHB was $337,412. Usual caveats apply to these data.

“Using the average loan size to FHB and assuming the scheme covers 15 per cent, the government will guarantee around $50,000 per loan. If the scheme has $500 million in funding, this implies:

• 9,879 loans if the scheme holds reserves covering 100 per cent of its commitments
• 49,395 loans with 20 per cent reserves
• 98,790 loans with 10 per cent reserves
• 197,583 loans with 5 per cent reserves”

Scheme may only cover 5,000 loans

However, the email went on to outline that as the average house prices are markedly higher than average loan size, the “upper bound” of the scheme’s cover would be much lower.

According to ABS figures for the December 2018 quarter, average house prices were $650,000.

As such, if all loans coming in to the scheme were for FHBs with 5 per cent deposits, only 5,128 loans a year would be covered by the $500-million FHLDS.

The RBA went on to outline that this would increase to 25,641 loans with 20 per cent reserves, 51,282 with 10 per cent reserves and 102,564 with 5 per cent reserves.

Since these emails were written, the ABS has released house price statistics for the March quarter, which show that the average house price was around $636,900. As such, the $500-million FHLDS would only cover 5,233 loans based on the new average house price figures.

[Related: Doubts cast over utility of FHB loan scheme]