While detractors have warned that the government’s 5 per cent Deposit Scheme is fuelling demand, brokers have revealed the scheme is spurring supply on the ground.
The expanded 5 per cent Deposit Scheme has been accused of turbocharging first home buyer demand without adding fresh housing, yet brokers said the story on the ground is more complicated.
The program, which allows eligible FHBs to enter the market with just a 5 per cent deposit and no LMI, now underpins close to half of new first home loans.
Yet, S&P Global Ratings recently warned that the extra support was lifting entry‑level prices and could eventually “backfire” on affordability.
PRD likewise found that while government support had pushed FHB activity higher, the average first home loan had climbed by 75 per cent since 2016 to about $560,000.
Caps out of step with prices
Against that backdrop, brokers have told The Adviser that the scheme’s price caps no longer reflect what their clients are seeing at auctions and open homes, forcing many to rethink what a starter home looks like.
Home Loan Experts mortgage broker Ajar Rajbhandari said that as clients discovered how little established stock fell under the threshold, more were choosing house‑and‑land packages.
“More people are leaning towards construction as first home buyers. That is mainly because they can’t find a property within the price cap, and so they try build something that is within the cap limit,” he said.
“This is a noticeable change this year and also what clients have told me when I’ve discussed why they want to build.”
He added that the Sydney cap now bore little resemblance to metro values, meaning traditional freestanding homes were increasingly out of reach.
“The property price cap doesn’t resonate with the actual market value. It’s very difficult for people to find a house within the limit,” Rajbhandari said.
Tony Xia, principal consultant at The Mortgage Agency, said that the mismatch was starkest for couples hoping to buy family homes in established middle‑ring suburbs.
“A lot of my first home buyer clients in Sydney come to me wanting a three-bedroom house in the Hills District or the North West, yet when we drill down on prices, the stock they’re looking at is sitting above the $1.5 million cap or they don’t see value on such older houses which sooner or later needs to be knocked down,” he said.
Brokers say 5% Deposit Scheme users turning to construction
Xia said discussions were increasingly pivoting to growth corridors, where new housing could still be structured under the scheme and added that this was beginning to make up a larger share of inquiries.
“Construction is becoming the default pathway for scheme-eligible buyers in Sydney, not because they want to build, but because that’s where the numbers work,” he said.
“This has accelerated noticeably over the past six months since the expanded caps came in.”
Looking ahead, Xia said the gap between Sydney’s median, now edging towards $2 million, and the scheme’s $1.5 million ceiling would deepen, further pushing buyers away from established homes in favour of new construction.
“What that means in practice is buyers have two choices: compromise on location and buy an older apartment or town house under the cap, or go to a growth corridor and build,” Xia said.
“Most of the young buyers I work with, particularly couples, they would rather build.”
Brokers say FHBs are embracing ‘compromise’
Nick Lissikatos, director of Sydney brokerage Trelos Finance, told The Adviser that the most noticeable shift he was seeing was among scheme users willing to sacrifice either space, dwelling type, or proximity to the CBD to stay within the rules.
“I do think more buyers will shift toward construction moving forward, particularly in growth corridors,” he said.
“I think the bigger trend is not just construction, it is compromise. More FHBs are broadening their search to apartments, town houses and outer-ring locations because that is where the scheme is still workable.”
Rate rises squeezing borrowing power
Alongside changing purchase patterns, brokers have reported a growing number of scheme clients learning that their borrowing power had shrunk between initial conversations late last year and formal approval in March.
Rajbhandari said borrowers who were able to service 95 per cent loans in November had since watched their capacity fall by tens of thousands of dollars.
“This is real, and it’s happening right now. We just reran the numbers as their land settlement is around the corner, with the 0.5 per cent rate rise, their borrowing power went down by around $40,000,” he said.
Lissikatos said buyers who looked strong on paper at the start of summer were now realising that their serviceability margins had been eroded.
“Some buyers who looked fine on paper in December or January are now finding the same loan amount harder to hold, which means their borrowing power has come back and their options have narrowed,” he said.
“In practice, that often pushes them into a lower price bracket or means they need to contribute more of their own funds to get the deal across the line.”
‘Pre‑approval is not a guarantee’
With more scheme users buying off‑the‑plan land or committing to builds that may not settle for months, brokers are stepping up warnings that pre‑approval can be cut back as rates or lender policies shift.
Rajbhandari said many FHBs wrongly assumed that the figure on their pre‑approval letter was locked in, without understanding that banks could later reassess at a higher rate.
“Pre-approval is not a guarantee, it’s an indication based on the rate and policy at the time,” he said.
“If the RBA moves between when you got pre-approved and when you go unconditional on a property, depending on the lender they have the rights to reassess your loan again at a higher rate.”
Lissikatos said that risk was particularly acute for highly leveraged scheme users and that he was urging clients to leave more headroom.
“I think more buyers need to be made aware of it,” he said.
“It can catch buyers out at exactly the wrong time, especially those trying to use the scheme, so it is critical they understand their buffer and do not shop right at the edge of their limit.”
[Related: 5% Deposit Scheme risks backfiring on housing: S&P]
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