Pros and cons of NSW's shared home equity scheme

The state government in New South Wales may help pay for a portion of the properties of frontline worker first home buyers, single parents, and older single Australians, in a new shared equity trial scheme.

The New South Wales government has committed $780.40 million in equity contributions in exchange for “an equivalent ownership share of the property” to help these Australians get a foot on the property ladder. The scheme is a similar proposition to the Albanese government’s pre-election promise of the Help-to-Buy scheme.

The scheme is set to begin in January 2023 and will accept 3,000 applications per financial year over FY 2022-23 and FY 2023-24.

For these eligible Australians, they may be able to purchase new or existing dwellings with a deposit as little as 2% and avoid paying costly Lender’s Mortgage Insurance (LMI).

The NSW government equity contribution will be:

• Up to 40% of the purchase price for a new dwelling
• Up to 30% of the purchase price for an existing dwelling

Participants will not be able to determine what portion of the loan the NSW government will contribute, as this is determined by its lending partner.

Who is eligible for the shared-equity scheme?

The state government’s shared equity scheme will be available to:

• A single parent with a child or children under 18 years of age
• A single person 50-years old or above
• First home buyer key workers – nurses, teachers, or police.

Applicants cannot have a household gross income greater than $90,000 for singles and $120,000 for couples.

In terms of property price caps, applicants must be purchasing a home with a value less than $950,000 in Sydney and major regional centres. These centres include Newcastle, Lake Macquarie, Illawarra, Central Coast, and the North Coast of NSW. For other regional areas, a price cap of $600,000 will be in place. This is identical to Labor’s Help-to-Buy scheme.

How much could the NSW government contribute?

Standard government scheme eligibility criteria will apply, including:

• Applicants must be 18-years old
• Applicants must be Australian or New Zealand citizens, or permanent Australian residents.
• Applicants must occupy the property as the principal place of residence (no investors).
• Applicants must demonstrate they cannot service a mortgage without the shared equity scheme but are still able to service the mortgage for the life of the loan.

What the government expects from you

The state government will also be ensuring that participants in the scheme are meeting a series of ongoing obligations. These include:

1. Annual review into eligibility – You must complete an annual review and provide information supporting your continued eligibility for the scheme.
2. Repairs and maintenance – You must maintain the property and ensure that it is in “working order”, according to the state government website.
3. Renovations - The government must also approve modifications or renovations as they pertain to the value of the property. If the value changes, this must be factored into the sale price.
4. Home ownership costs – Unlike with a guarantor home loan, you are responsible for the payment of ongoing property ownership costs like council rates, strata fees, home loan repayments and more.

Regarding the first point, it’s important that applicants note that if you no longer meet the above eligibility criteria, you may be required to begin repayment of the equity contribution made by the government.

Further, if your income exceeds the threshold for two consecutive annual review reporting dates, you may also be required to begin repayment of the equity contribution made by the government.

Can I use this scheme with other government buyer assistance schemes?

As mentioned above, the NSW government’s shared-equity trial scheme is similar to one proposed by the Labor government for all first home buyers earning under $90,000 for singles and $120,000 for couples.

No, home buyers are not able to use both shared-equity schemes. As they are essentially identical schemes outside of the eligible applicants being more specific in NSW, if you’re interested in being a participant, it may be worth keeping an eye on which scheme has more places available when you are lodging your application.

The NSW government’s shared equity scheme does not impact stamp duty concessions or exemptions. If your property falls into either of these categories, you may benefit from waived stamp duty as well as waived LMI for your home loan. And considering that the NSW government is considering scrapping stamp duty, this eye-watering upfront cost may soon be a thing of the past.

Pros and cons: what home buyers need to keep in mind about the scheme

For those considering participating in the NSW government’s shared equity scheme, it’s crucial that you remember taking out a home loan with a smaller deposit always carries a level of risk.

If paying the deposit means wiping your savings, especially for lower-income earners, this can create significant financial stress when inevitable events occur. Interest rates are on the rise across Australia, plus hot water systems can burst and other unexpected property damages can occur. Try to keep on top of your saving goals while repaying a mortgage with a smaller deposit.

However, repaying a smaller loan does generally mean smaller, more manageable mortgage repayments. This could be a life saver for applicants who are already more susceptible to financial stress when interest rates continue to rise in 2022.

Speaking of interest rates, at this point it’s hard to know what interest rates a homebuyer may pay for a shared-equity scheme home loan. If a lender views the government contribution to your property as separate to your 2% deposit, you may be more likely to be offered a higher rate due to the added risk to the lender. But if the lender views the percentage of the government purchase as like you were applying with 30-40% a deposit, you may gain a more competitive interest rate.

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