Government sets price caps for FHB scheme

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 should they have a deposit of at least 5 per cent.

The scheme is to be administered by the National Housing Finance and Investment Corporation (NHFIC), which commenced consultation with stakeholders in September.

The scheme has come under scrutiny from policymakers and industry stakeholders, who have been calling for more information regarding the practical administration of the program.

In light of such scrutiny, the Morrison government has released for consultation the National Housing Finance and Investment Corporation Investment Mandate Amendment Direction 2019, containing new information regarding its First Home Loan Deposit Scheme (FHLDS).

The government has proposed that applications for loan guarantees be subject to property price caps in addition to income-based restrictions, which will vary between capital cities/large regional centres with a population of over 250,000 and regional areas.

The price caps are as follows:

• NSW: A price cap of $700,000 in capital cities and regional centres, with a cap of $450,000 in the rest of the state.
• Victoria: A price cap of $600,000 in capital cities and regional centres, with a cap of $375,000 in the rest of the state
• Queensland: A price cap of $475,000 in capital cities and regional centres, with a cap of $400,000 in the rest of the state
• Western Australia: A price cap of $400,000 in capital cities and regional centres, with a cap of $300,000 in the rest of the state
• South Australia: A price cap of $400,000 in capital cities and regional centres, with a cap of $250,000 in the rest of the state
• Tasmania: A price cap of $400,000 in capital cities and regional centres, with a cap of $300,000 in the rest of the state
• ACT: A price cap of $500,000
• Northern Territory: A price cap of $375,000

The direction does not specify the manner in which applicants will be selected; however, upon the release of the proposals, Minister for Finance Mathias Cormann told the media that there is “no specific number of guarantees per jurisdiction”, and that approvals will be on a “first-in, best-dressed basis”.

Lender eligibility

The government has also proposed eligibility criteria for the selection of credit providers to facilitate loan guarantees.

According to the government’s direction, credit providers will be selected on the basis of:

• the lender’s standard of customer care, including their treatment of borrowers in financial hardship;
• the competitiveness of loan products offered by a lender for the purposes of the FHLDS, including interest rates and other fees;
• the quality of a lender’s loan origination processes and the associated level of financial risk to the Commonwealth;
• the reputation of the lender;
• the extent to which the decision to approve a lender will promote competition in lending markets and related markets; and
• the extent to which all the lenders approved for the financial year when considered together can undertake credit activities (including through other entities providing credit services) across Australia.

Moreover, the government revealed that the big four banks (including their subsidiaries) will not be permitted to facilitate more than 5,000 loan guarantees in each financial year, in a bid to enhance market competition.

“These rules are designed to ensure the government’s expectation that smaller lenders play a significant role in the First Home Loan Deposit Scheme to boost competition is met,” the direction reads.

Stakeholders are invited to comment on the draft investment mandate amendment and associated material, with submissions closing on Monday, 4 November.

APRA to adjust capital requirements for FHLDS

In light of the government’s proposals, the Australian Prudential Regulation Authority (APRA) is proposing to adjust its capital requirements for authorised deposit-taking institutions (ADIs) to support the FHLDS.

“Recognising that the government guarantee is a valuable form of credit risk mitigation, APRA is proposing to reflect this in the capital framework by applying a lower capital requirement to eligible FHLDS loans,” the regulator has noted. 
 
APRA stated that it intends to give effect to this lower capital requirement by adjusting the mortgage capital requirements set out in Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112).

Specifically, APRA proposes to allow ADIs to treat eligible FHLDS loans in a comparable manner to mortgages with a loan-to-valuation ratio of 80 per cent, which would allow eligible FHLDS loans to be risk-weighted at 35 per cent under APRA’s current capital requirements.

The prudential regulator added that once the government guarantee ceases to apply to eligible loans, ADIs would revert to applying the relevant risk weights as set out in APS 112. 

APRA has invited feedback on its proposal, which will be subject to a two-week public consultation.

[Related: Best interests duty won’t be shock to system]