The Victorian Homebuyer Fund (HBF) is an initiative by the Victorian government to financially assist eligible home buyers enter the property market. According to the banks that are administering the scheme it is proving to be extremely popular.
On first impressions the scheme appears to be generous as the government provides an interest free loan of up to 25% of the purchase price. In return the government takes 25% of the capital growth of the property.
Buyers can make voluntary contributions (repayments) towards paying off the 25% government loan. When a voluntary contribution is made or when the loan is paid in full a valuation is conducted so that the government can ascertain their share of the capital growth.
The fairness of the scheme for home buyers is tied to the valuation. Therein lies the problem.
Valuing a property is not an exact science, valuations can vary substantially between different valuers. Valuers can and do get it wrong! It is for this reason the scheme could turn rotten for buyers.
A high valuation means the home buyer’s voluntary contribution becomes negligible as most of the home buyer’s repayment is paid to the government in the form of shared capital growth. The fact is buyers are at the mercy of the government’s valuer!
Let’s look at two scenarios with different valuations to demonstrate my point. In both situations the buying price is $500,000, the HBF provides $125,000 (25%) towards the purchase and the applicant makes a $30,000 voluntary contribution.
In the first scenario the property is valued at $550,000. Of the $30,000 repayment the government takes 25% of the capital growth being $12,500. The remaining $17,500 of the repayment is deducted from the $125,000 loan, this means the buyer now owes $107,525. In summary the buyer has paid $30,000 and reduced the loan by $17,475, $12,525 going to the government in shared capital growth.
In the second scenario the property is valued at the higher amount of $600,000. Of the $30,000 repayment the government takes 25% of the capital growth being $25,000. The remaining $5,000 of the repayment is deducted from the $125,000 loan, this means the buyer now owes $120,000. In summary the buyer has paid $30,000 and reduced the loan by a meagre $5,000, the other $25,000 goes into government coffers as shared capital growth.
Further, the rules of the scheme state that buyers are required to pay back the government loan in full within 60 days of paying off the primary home loan. This may not end well for the homeowner.
For example, let’s assume the purchase price was $500,000, the HBF provides $125,000 (25%) towards the purchase and the homeowner pays off the primary loan in 20 years.
Given Melbourne’s average rate of capital growth, after 20 years it is likely the property would be conservatively valued at around $1,200,000 resulting in capital growth of $700,000. This means that the applicant now owes the HBF $300,000 (25% of the capital growth being $175,000 plus the original loan of $125,000). In this situation the applicant needs to find $300,000 within 60 days.
If the applicant doesn’t have the required amount, refinancing using the equity of the property is an option. If the applicant doesn’t have sufficient income to allow for refinancing, then the only other option is to sell the property. This would be a dreadful outcome for homeowners.
As the saying goes “there is no such thing as a free lunch.” The scheme is certainly not a free loan of 25% of the purchase price. Homebuyers should be aware that there is a cost and depending on the valuation could end up being an expensive experience.
