The Equity Catch of Government Shared Equity Schemes

Virginia Graham Riches: Welcome back to the Property and Mortgage Insights Australia podcast. I'm Virginia Graham, a mortgage broker and co-author of Flirting with Finance, joined today by the exceptional broker Phil Riches from Finance on the Coast. Today's topic is the Budget handed down today — the first-home-buyer changes, foreign property investors, and how it all affects people.

Phil Riches: Thank you. There were two changes in the Budget — one affecting foreign investors, and an expansion to a government scheme called Help to Buy. Help to Buy is a shared-equity scheme: in simple terms, the government funds part of your deposit, putting in 30% of the property value. They're not doing that for free — in return they take a share on the title, so they own 30% of your property for the term of ownership, until you're able to pay them out.

Phil: One consideration before the changes: if you bought a $1 million property, the government's 30% stake is $300,000. If that property is worth $2 million in 10 or 15 years, the government's share is then worth $600,000. So it helps you into the market, which is great — but their 30% also captures the future capital growth, whereas outside the scheme that growth would be more yours.

Phil: As for the announcement — budgets are funny; they tell you what they're doing but leave a lot of questions unanswered. Later this year Help to Buy will be expanded so the maximum property values are higher. In the greater Sydney area the cap will be $1.3 million. There's also an income test: a single applicant can earn up to $100,000 before tax, and a couple's combined income can't exceed $160,000. Caps differ by state according to median prices — Brisbane around $1 million, Melbourne and some others lower. It could be really useful for someone who doesn't mind the government owning a share of their property.

Phil: The other change was for foreign investors. Unless they're buying land to build, or buying off the plan, there's a temporary two-year ban on foreign investment in established dwellings — units or houses. The rationale is the heated property market: as interest rates stabilise or come down, the idea is to give first-home buyers a chance to get in ahead of a foreign investor. That makes a lot of sense — home ownership has become harder and harder, and anything that helps stabilise prices for first-home buyers is a good move.

Phil: Coming back to first-home buyers, the expanded Help to Buy with its $1.3 million threshold is good — but it would be remiss not to mention the other government scheme, which might save more money if you can keep the budget down and find a lower-priced property. Using Sydney again: there's a scheme where, with a 5% deposit — either saved over time and shown, or gifted and held in a bank account in your name for at least three months, which counts as 'genuine savings' — you can buy up to $900,000 in metropolitan Sydney, or around $550,000 in regional areas where values are lower.

Phil: It's a true 5% deposit. The only other cost is your conveyancing fees, usually around $1,500, and you're into the property. There are around 15 to 20 lenders in that Home Guarantee scheme — a good mix of banks and non-banks — and about 35,000 places, a generous allocation. With steady employment and an income under the government threshold of $125,000 for a single applicant, you can get a sharply priced loan for the other 95%.

Phil: The key differences are huge. You don't pay any stamp duty — on a $700,000 to $900,000 property in New South Wales that's somewhere between $35,000 and $45,000, an upfront cost that doesn't benefit you. And outside the scheme, a 5% deposit loan normally means mortgage insurance of roughly $20,000 to $25,000. So between the two, the government assistance can save you $60,000 to $70,000 that would otherwise be money down the drain. By contrast, the Help to Buy scheme has no stamp-duty waiver — on a $1.3 million property you're looking at about $65,000 in stamp duty that you do have to pay.

Phil: Stamp duty originally came from the state government stamping documents like mortgages and contracts; it's become a cash grab, really — money down the drain — so if it can be avoided, that's a great idea. The First Home Guarantee could set you up better: it gets you on the property ladder with nobody else holding an interest in your property, and nobody else benefiting from the capital growth. Even if it's not your dream home, that's the key thing for first-home buyers — get on the ladder with a nice property; it's a stepping stone to the dream home later.

Phil: It's about getting into the market, avoiding as many unnecessary costs as you can, and then going really hard at the mortgage — using an offset account and paying extra off the loan as a priority. We've all got to live, but for a first-home buyer, attacking that mortgage is absolutely key.

Virginia: What if you bought a $1.3 million property with the government and a year later sold it for less?

Phil: It remains to be seen because the scheme is so new, but the government owns a percentage — so if it goes up they share 30%, and if it goes down they share 30% too. It's highly unlikely, unless you overpaid in the first place in a major capital city, to see a property go backwards. But it's a good question, because not everything goes as we expect — which is why property should be treated, especially as an investor, as a minimum 10-year investment.

Phil: I'm not a fan of buying a property, dressing it up and flipping it, because of stamp duty and mortgage interest. If you buy something that needs attention, you're still paying stamp duty, still paying interest, and then paying to improve it. You might flick it in 12 months for a profit, but once you deduct the stamp duty and interest, it's rarely as good as it looks. I've always preferred buying a place in good repair as a long-term investment.

Virginia: And that's more for investors. Thanks so much, Phil.

Phil: Pleasure — we'll have to have you on again soon.