Rising rental costs across Australia are reshaping the value proposition of the federal government’s First Home Guarantee (FHG), according to new analysis from Cotality. While the scheme allows eligible buyers to purchase a home with a deposit as low as 5% without paying Lenders Mortgage Insurance (LMI), it also results in a larger loan and, consequently, higher interest payments over time. However, with rents soaring, the savings from exiting the rental market sooner may now outweigh the additional long-term interest burden, particularly in cities like Sydney and Brisbane.

The FHG, which has assisted over 168,000 homebuyers since its inception in January 2020, works by having the government guarantee the gap between a buyer’s deposit and the standard 20% deposit, saving them tens of thousands of dollars in LMI fees. The main drawback for individuals is the extra interest paid on a larger loan. For example, on a loan for the median Australian dwelling value of $848,858, a 5% deposit would result in $841,930 in total interest over 30 years, compared to $679,086 for a 20% deposit. This significant increase in interest costs has been a key consideration for potential applicants.

However, the dramatic increase in rental prices has introduced a new variable into this equation. Since January 2020, the median weekly rent in Australia has surged by an estimated $200, reaching $669 per week, which amounts to an extra cost of over $10,000 annually for renters. This financial pressure makes the prospect of fast-tracking home ownership more appealing, as the money saved on rent can offset the higher mortgage interest.

Cotality’s analysis illustrates this trade-off across major cities. In Sydney, for instance, using the FHG could reduce the time needed to save a deposit by an estimated six years, potentially saving a homebuyer $251,161 in rent. While the additional interest on a maximum-value loan ($1.5 million) in Sydney would be approximately $234,909, the rent savings alone more than cover this extra cost. When combined with the LMI savings (between $56,000 and $80,000), the net financial benefit becomes even clearer, with potential upper-bound savings of $96,252. This pattern holds true for other capital cities like Brisbane and Adelaide, where potential rental savings also exceed the added interest costs. In fact, the analysis shows that the savings from rent far outweigh the savings on LMI.

It is important to note that this analysis is illustrative and based on several assumptions, such as purchasing at the maximum price cap and having a 15% savings rate. Individual circumstances will vary, and for those not paying rent, saving for a 20% deposit to avoid higher interest costs might be more beneficial. Nevertheless, the policy is criticised as a “demand side stimulus” that boosts home values without addressing the root causes of unaffordable housing and rents.