First-home buyers using the Coalition's controversial deposit scheme will pay tens of thousands of dollars in extra interest and face larger monthly repayments in a major windfall for some of Australia's largest banks and lenders.
As Prime Minister Scott Morrison conceded the policy would have a "firming" affect on falling house prices, experts warned a key element of the plan will actually leave first-time buyers in debt for much longer.
But former Reserve Bank governor Bernie Fraser gave tentative backing to the policy, saying it should help people "at the margin" enter the property market and that caution among banks would prevent borrowers taking on excessive debt.
Under the Coalition's election-eve proposal - which was swiftly matched by Labor - first home buyers will only need a 5 per cent deposit for a mortgage compared to the usual 20 per cent. The government will effectively guarantee the difference for up to 10,000 people a year.
But borrowing the difference between a 5 and 20 per cent deposit will bite the new home owners for the length of a 30-year mortgage.
On a $500,000 property, a first-time buyer now has to stump up $100,000 deposit, leaving them with a $400,000 mortgage. Over the life of a 30 year loan, the buyer would pay $304,000 in interest with monthly repayments of $1956.
But a 5 per cent deposit on the same property would be $25,000, forcing the buyer to borrow $475,000. Over the life of that loan, they would pay $57,000 more in interest than someone with a 20 per cent deposit.
Of more immediate concern would be the monthly repayment of $2327, or $371 more than the person who had a larger deposit.
Someone taking out a mortgage on a $400,000 property would face $289,000 in interest under the Coalition's proposal compared to $247,000 if they had a 20 per cent deposit.
A person with 20 per cent downpayment would make a $1565 monthly repayment compared to $1858 for someone with the bare minimum deposit.
Mr Fraser, who also chaired ME Bank after running the RBA between 1989 and 1996, said the banks' current caution would protect borrowers.
"For the time being I think they're going to be pretty cautious and pretty prudent, and it's that that I think will in a way protect prospective first-home buyers to some extent," he said.
IFM Investors chief economist Alex Joiner said the best policies to make housing more affordable were those that encouraged stable employment and solidy increased wages.
He said the Coalition's plan, which was matched by Labor leader Bill Shorten within two hours of being announced on Sunday, would actually load up debt on people who were not in a solid financial position to take it on.
"The government talks about the price of a house, they don't talk about the cost that these people are going to saddled with for years and years," he said.
"They're trying to shoe-horn people into the property market. These are people who are at the marginal end of the market and so can't afford to be it in the first place, and probably shouldn't be there."
Mr Morrison on Tuesday said the scheme "wasn't free money" but said it would mean less young Australians need to ask the "bank of mum and dad" for the cash. He has already flagged that the policy could be expanded if there was strong demand.
Grattan Institute fellow Brendan Coates said in its current form, capped at 10,000 entrants a year, the policy would have almost no impact but warned any expansion could actually make the situation more difficult for first time buyers.
"If you get rid of the cap then you'd have people pulling forward their purchases, you'd have more people in the market competing for the same properties, that would drive up prices and do nothing for affordability," he said.
"If you really want to deal with this you have to deal with supply and that means looking at planning regulations in the middle-ring suburbs of Sydney and Melbourne."
Former prime minister Paul Keating also warned the policy focussed on demand rather than the supply of properties available to first time buyers.
"The risk is that people get the 5 per cent, momentarily it helps them but the prices rise by more than 5 per cent on the supply side," he told ABC radio. "The supply side doesn't increase the prices by 5 per cent."
Mr Morrison confirmed a report by The Sydney Morning Herald and The Age that the policy had not gone to cabinet, saying it had been discussed by the Coalition's "senior economics team".
Mr Shorten deflected questions over Labor's quick support for the policy, labelling it a "modest proposal" while arguing the opposition was doing far more to encourage housing affordability.
With Clancy Yeates
- SMH/The Age