Report says 5% deposit scheme could weaken lenders’ loss protection and lift prices
An expanded federal guarantee for first-home buyers could have unintended effects on Australia’s housing and mortgage markets, including greater pressure on house prices and reduced use of lenders’ mortgage insurance (LMI), according to a new report from S&P Global Ratings.
In a report published on Monday, the ratings agency said government-backed credit support was displacing parts of the private mortgage insurance market and shifting risk on to the public balance sheet.
The scheme, introduced in 2020, allows eligible first-home buyers to purchase a property with a minimum 5% deposit without taking out LMI. The program had supported more than 230,000 guaranteed loans since launch.
“The Australian Government 5% Deposit Scheme effectively undercuts insurers and gives away credit protection,” said S&P Global Ratings credit analyst Angela Zhou (pictured right). “It shifts mortgage credit risk from private insurers to the sovereign.
“This brings forward buyer demand and will further fuel house price appreciation.”
S&P also raised concerns about the level of loss cover provided. The report said the government guarantee substitutes for insurer backing but protects lenders only up to 15% of the mortgage exposure, whereas LMI typically provides full cover for insured losses.
Read more: Government giving 'tax-payer funded support to wealthier borrowers' says LMI provider Helia
“We believe banks will receive less protection against credit losses under the scheme, compared with what they receive under lenders’ mortgage insurance,” Zhou added.
Despite the shift away from LMI, S&P said the Commonwealth’s exposure should remain limited under its base case. It pointed to rising property values and the continued personal liability of borrowers for their debts as factors that may reduce the likelihood of broad defaults and forced sales.
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