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National Housing Finance and Investment Corporation Amendment Bill 2019

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2019

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

NATIONAL HOUSING FINANCE AND INVESTMENT CORPORATION AMENDMENT BILL 2019

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the Minister for Housing and

Assistant Treasurer, the Hon. Michael Sukkar MP)

 

 



Table of contents

Glossary............................................................................................................. 1

General outline and financial impact........................................................... 3

Chapter 1 ........... First Home Loan Deposit Scheme................................... 5

Chapter 2 ........... Regulatory impact statement.......................................... 13

Chapter 3 ........... Statement of Compatibility with Human Rights.......... 27

 

 



The following abbreviations and acronyms are used throughout this Explanatory Memorandum.

Abbreviation

Definition

Bill

National Housing Finance and Investment Corporation Amendment Bill 2019

Investment Mandate

National Housing Finance and Investment Corporation Investment Mandate Direction 2018

NHFIC

National Housing Finance and Investment Corporation

NHFIC Act

National Housing Finance and Investment Corporation Act 2018

 

 



First Home Loan Deposit Scheme

The Bill amends the NHFIC Act to establish the framework for the First Home Loan Deposit Scheme to assist eligible first home buyers to access the housing market sooner. It does this by expanding the NHFIC’s functions to enable it to:

•                provide guarantees to improve access to home ownership; and

•                undertake research into housing affordability, including supply and demand.

The Investment Mandate (made under the NHFIC Act) will be amended to outline the nature and conditions of the guarantee provided by the NHFIC to lenders for eligible first home buyers under the First Home Loan Deposit Scheme, and the scope of the research function.

Date of effect : The amendments apply from the day after Royal Assent and, subject to timing of passage of the Bill, allow for the issuing of guarantees from 1 January 2020.

Proposal announced : This Bill, together with amendments to the Investment Mandate, will implement the measure ‘First Home Loan Deposit Scheme’ announced by the Government on 12 May 2019 during the 2019 Federal Election.

Financial impact : Administrative and research costs will be a maximum of $25 million over the forward estimates, with final allocation to be settled and included in 2019-20 Additional Estimates Bills. Estimated claim costs of $4 million over the forward estimates will be met from the standing appropriation contained in the Bill.

Human rights implications : This Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 3, paragraphs 3.1 to 3.6.

Compliance cost impact : Participating in the First Home Loan Deposit Scheme will involve compliance costs for business (lenders and mortgage brokers). Compliance costs have been estimated at $2.17 million per year.

Summary of regulation impact statement

Regulation impact on business

Impact : Compliance costs have been estimated at $2.17 million per year.

Main points :

•        Implementation of the First Home Loan Deposit Scheme imposes some regulatory costs on participating lenders.

•        Before offering guaranteed loans, participating lenders will need to update their internal systems, and train front-line lending staff, including on how to apply the eligibility criteria. There will also be a per-loan regulatory cost to write a guaranteed loan, as the process will involve determining Scheme eligibility and communicating with the NHFIC.

•        These costs are discretionary and non-participating lenders will not face any additional regulatory costs. Lenders will choose to participate if they feel that the commercial benefits of participating in the Scheme are sufficient to offset the associated administrative and regulatory costs.

•        Additionally, mortgage brokers who wish to offer the guaranteed loans to their clients will require training or self-education.

 

 



Chapter 1          

First Home Loan Deposit Scheme

Outline of chapter

1.1                   The Bill amends the NHFIC Act to establish the framework for the First Home Loan Deposit Scheme to assist eligible first home buyers to access the housing market sooner. It does this by expanding the NHFIC’s functions to enable it to:

•        provide guarantees to improve access to home ownership; and

•        undertake research into housing affordability, including supply and demand.

1.2                   The Investment Mandate (made under the NHFIC Act) will be amended to outline the nature of, and conditions, of the guarantee provided by the NHFIC to lenders for eligible first home buyers under the First Home Loan Deposit Scheme, and the scope of the research function.

1.3                   All references to legislation in this Chapter are to the NHFIC Act unless otherwise stated.

Context of amendments

1.4                   On 12 May 2019, the Government announced that the Commonwealth, via the NHFIC, would provide a guarantee to allow eligible borrowers to purchase a modest home with a deposit of as little as 5 per cent.

1.5                   The Government announced that the First Home Loan Deposit Scheme is intended to support up to 10,000 purchases of dwellings by first home buyers each year, and that eligibility criteria will incorporate income and regional dwelling price limits.

1.6                   The First Home Loan Deposit Scheme is designed to support housing affordability for first home buyers. Research indicates that the ability to save a deposit is a greater constraint on home ownership for first home buyers than the ability to service a home loan.

1.7                   The Government also announced that the NHFIC will develop the capacity to conduct research into housing demand, supply and affordability. The NHFIC’s new research function is intended to support the monitoring of housing demand, supply and affordability in Australia - highlighting current and potential gaps between housing supply and demand while also complementing existing Australian housing related research.

1.8                   The First Home Loan Deposit Scheme is intended to complement other existing housing affordability measures. As part of the 2017-18 and 2018-19 Budgets, the Government announced a comprehensive package of measures to reduce pressure on housing affordability in Australia and support local communities. This includes, for example, the First Home Super Saver Scheme, which assists savers to build a deposit for a first home inside their superannuation fund by making voluntary contributions, and the establishment of the NHFIC.

The National Housing Finance and Investment Corporation

1.9                   The NHFIC is a corporate Commonwealth entity dedicated to improving housing outcomes. It was established by the NHFIC Act on 30 June 2018.

1.10               The establishment of the NHFIC was a key element of the Government’s Reducing Pressure on Housing Affordability plan announced in the 2017-18 Budget.

1.11               The NHFIC currently has broad functions to administer:

•        a $1 billion National Housing Infrastructure Facility, which provides finance for critical infrastructure to support new housing, particularly affordable housing, and to bring forward the supply of such housing;

•        the Affordable Housing Bond Aggregator, which provides cheaper and longer term finance for registered community housing providers, enabling them to improve housing outcomes for their clients. These providers are non-government organisations, generally not-for-profit organisations, which provide subsidised housing for people on a very low, low or moderate income, or for people with additional needs; and

•        a capacity building program for registered community housing providers to assist them to develop their financial and management capabilities in support of a NHFIC loan application.

1.12               The NHFIC’s functions are set out in the Investment Mandate made under section 12 of the NHFIC Act.

Summary of new law

1.13               The Bill amends the NHFIC Act to establish the framework for the First Home Loan Deposit Scheme. It does this by expanding the NHFIC’s functions to enable it to:

•        provide guarantees to improve access to home ownership; and

•        undertake research into housing affordability, including supply and demand.

1.14               The Bill also establishes the funding mechanism for the First Home Loan Deposit Scheme. A standing appropriation will provide the NHFIC with funds to meet liabilities under First Home Loan Deposit Scheme guarantees as they arise.

1.15               The Government will provide further direction to the NHFIC about the operation of the First Home Loan Deposit Scheme and the research function in amendments to the Investment Mandate. This will include directions concerning the eligibility criteria and the operation of the First Home Loan Deposit Scheme, and the scope of the research function.

Comparison of key features of new law and current law

New law

Current law

Issue of guarantees by NHFIC

The NHFIC provides a limited guarantee to lenders to allow eligible first home buyers to purchase or construct a dwelling.

No equivalent.

Housing affordability research by NHFIC

The NHFIC will undertake research into housing affordability, supply and demand.

No equivalent.

Appropriation of liabilities from Consolidated Revenue

A standing appropriation will provide the NHFIC with funds to meet liabilities under First Home Loan Deposit Scheme guarantees as they arise.

No equivalent.

Detailed explanation of new law

New functions

1.16               The Bill amends the NHFIC Act to establish the framework for the First Home Loan Deposit Scheme. It does this by expanding the NHFIC’s functions to enable it to:

•        provide guarantees to improve access to home ownership; and

•        undertake research into housing affordability, including supply and demand.

[Schedule 1, item 4, paragraphs 8(1)(ca) and (cb)]

1.17               The purpose of establishing the guarantee function is to allow the NHFIC to issue guarantees to participating lenders to allow eligible first home buyers to purchase or construct an owner-occupied dwelling earlier. [Schedule 1, items 2 and 4, section 4 and paragraph 8(1)(ca)]

The Investment Mandate

1.18               The Government will provide further direction to the NHFIC about the operation of the First Home Loan Deposit Scheme in amendments to the Investment Mandate. This approach is consistent with that which applies to the NHFIC’s existing functions and provides flexibility to adjust the First Home Loan Deposit Scheme as market conditions change. [Schedule 1, items 7, 8 and 9, subparagraph 13(b)(iia), and paragraphs 13(c) and (d)]

1.19               Section 14 provides a number of limits on the Minister’s direction-making power to ensure the independence of the NHFIC. The amendments ensure that the limit of the Minister’s direction-making power also applies when the NHFIC provides guarantees under the new guarantee function. This ensures that no specific lenders or borrowers receive or are prevented from receiving guarantees at the direction of the Minister. [Schedule 1, items 10 and 11, subparagraphs 14(a)(iia) and (v)]

1.20               An overview of the proposed amendments to the Investment Mandate is provided below.

First Home Loan Deposit Scheme

1.21               Under the First Home Loan Deposit Scheme, the NHFIC will provide a guarantee on eligible loans equal to the difference between the deposit (of at least 5 per cent) and 20 per cent of the property purchase price, with coverage broadly consistent with a parental guarantee.

1.22               The amendments to the Investment Mandate will include income tests for first home buyer eligibility, modest dwelling price limits and an annual cap of 10,000 guarantees issued.

1.23               Eligibility requirements for applicants will be introduced under the Investment Mandate. First, the applicant must be a first home buyer. Further, the applicant must satisfy an income test. Where there are multiple applicants for a single loan, each applicant must satisfy all eligibility criteria.

1.24               Eligibility requirements for loans will be introduced under the Investment Mandate. A loan is eligible if:

•        it is for the purchase of residential property or the construction of a dwelling on vacant land that forms part of the borrower’s residential property;

•        the residential property or dwelling will be owner-occupied;

•        the purchase price of the property is less than the price cap that applies in the area where the property is located;

•        the loan-to-value ratio of the loan at origination is between 80 and 95 per cent; and

•        it requires regular repayments of the principal.

The research function

1.25               The purpose of the research function is to allow the NHFIC to undertake research into housing affordability in Australia, including housing supply and demand. This will support the conduct of Australia-wide research that monitors current and projected housing supply and demand, and housing affordability in Australia. The research function will complement existing Australian research.

Standing appropriation

1.26               The Bill establishes the funding mechanism for the First Home Loan Deposit Scheme. A standing appropriation will provide the NHFIC with funds to meet guarantee liabilities under the First Home Loan Deposit Scheme as they arise. Guarantee liabilities arise under First Home Loan Deposit Scheme where a lender’s loss is covered by a guarantee, the lender makes a claim against the guarantee and the NHFIC accepts the claim. [Schedule 1, item 13, section 48A]

1.27               Because liabilities under the First Home Loan Deposit Scheme are met by the standing appropriation, the NHFIC is not required to maintain capital and reserves to meet these liabilities. [Schedule 1, items 3 and 12, section 5 (definition of ‘guarantee liabilities’) and paragraph 48(1)(a)]

Consequential amendments

Constitutional powers

1.28               The Bill expands the number of provisions in the Constitution under which the NHFIC can perform its functions to include banking within the meaning of paragraph 51(xiii) of the Constitution. [Schedule 1, item 5, paragraph 10(1)(ca)]

1.29               This ensures that the NHFIC Act includes all possible heads of constitutional power for the expanded functions that the NHFIC will perform and that the performance of functions within these constitutional powers is authorised. The amendments therefore ensure the NHFIC’s functions and powers cannot exceed the Commonwealth’s legislative power under the Constitution.

1.30               The Bill ensures that the NHFIC Act does not apply to State banking. This is because the Commonwealth’s legislative power under the Constitution applies to making laws with respect to banking other than State banking. [Schedule 1, item 6, subsection 10(4)]

Annual reports

1.31               Under the Public Governance, Performance and Accountability Act 2013 , the Board must prepare an annual report. The Bill adds additional matters that the Board must report to the Minister in its annual report.

1.32               In particular, the annual reports of the NHFIC must include a summary of:

•        financial support provided by guarantees; and

•        details of the NHFIC’s research during the reporting period on housing affordability in Australia.

[Schedule 1, items 14 and 15, paragraphs 56(b) and (c)]

1.33               Annual reports must be tabled in Parliament under section 46 of the Public Governance, Performance and Accountability Act 2013 .

1.34               This amendment ensures there is appropriate reporting of the provision of financial support and Commonwealth risks, and of the NHFIC’s research on the topic of housing affordability in Australia.

Application and transitional provisions

Commencement

1.35               The amendments commence on the day following Royal Assent. This allows the NHFIC to undertake preparation for the start of the First Home Loan Deposit Scheme on 1 January 2020, subject to timing of passage of the Bill. This includes the recruitment of staff, contractual arrangements with participating lenders and other matters of a practical nature for the First Home Loan Deposit Scheme. [Clause 2 of the Bill]

Transitional provisions

1.36               The amendments contain a transitional provision that provides the NHFIC must not make a decision to issue guarantees before:

•        the day specified by the Minister by legislative instrument that is on or after 1 January 2020; or

•        if no day is determined by the Minister, the later of 1 January 2020 or three months after the day the Bill commences.

[Schedule 1, item 16]

1.37               This transitional provision ensures that, subject to timing of passage of the Bill, the First Home Loan Deposit Scheme is able to commence on 1 January 2020 while allowing time for preparations for the Scheme to be made following the commencement of the Bill.



Chapter 2          

Regulatory impact statement

Background

2.1                   On 12 May 2019, the Government announced it would implement the First Home Loan Deposit Scheme (the Scheme), which will provide a limited guarantee to allow first home buyers (FHBs) to purchase a home with a minimum deposit of 5 per cent of the property purchase price without needing lenders mortgage insurance (LMI). A number of policy details were announced by the Government, including that the Scheme would assist 10,000 FHBs per year and will be implemented by the National Housing Finance and Investment Corporation (NHFIC).

2.2                   Given the Government’s election commitment, alternative policy options are not considered in this Regulation Impact Statement. However, the rationale behind the scheme, implementation considerations, and likely impacts are discussed.

1. The problem

2.3                   In recent decades, it has become more challenging for FHBs to save a deposit to purchase their first property. Saving a sufficient deposit can be a barrier to home ownership, and the proportion of households that own a home has fallen to 66 per cent, down from 70 per cent in 1997-98. [1]

2.4                   There are a range of housing affordability measures that consider indicators such as housing prices, incomes and interest rates. A common measure of housing affordability is the ratio of housing prices to household incomes. This measure has increased steadily since the early 1980s, and has increased particularly rapidly over recent years. [2]

Figure 1: National housing price-to-income ratio (RBA) [3]

2.5                   The mortgage debt-servicing ratio, which captures the cost of servicing mortgage debt relative to income, suggests that housing affordability is around its long-run average due to low interest rates in recent years. [4] Similarly, the Reserve Bank of Australia (RBA) found that national housing accessibility for FHBs is around the long-run average, however cities such as Sydney and Melbourne have become significantly less affordable. [5] In addition, FHBs have become more constrained by the size and location of properties available for their purchase.

2.6                   Therefore, despite borrowers’ ability to service a loan, especially given historically low interest rates, relatively high housing price-to-income ratios mean that FHBs must save for a longer time to accumulate a deposit. [6]   Based on a median household income and a 15 per cent saving rate (on before tax income), it takes approximately eight years to save a 20 per cent deposit on a median priced home.

Deposit requirements and lenders mortgage insurance

2.7                   Borrowers may have access to loans with deposits of as low as 5 per cent of the property purchase price (95 per cent loan-to-value ratio (LVR)), however, lenders require them to pay for LMI. Lenders generally require borrowers to have a deposit of at least 20 per cent of the property purchase price (80 per cent LVR) to not require LMI or a parental guarantee.

2.8                   LMI protects a lender from losses in the event of a borrower defaulting on a home loan. Lenders typically require a borrower to purchase LMI for high-LVR loans, as these loans have a higher risk of default and have a smaller deposit (less equity).

2.9                   LMI providers charge an upfront premium to lenders (e.g. banks) that is then passed on to borrowers, often by capitalising it into the home loan. The size of the premium depends largely on the LVR of the home loan and is generally equivalent to one to two per cent of the loan value (i.e. $5,000-$10,000 for a $500,000 home loan). LMI is widely utilised by FHBs.

2.10               Some lenders do not require borrowers with an LVR above 80 per cent to pay LMI if the loan is covered by a parental guarantee with additional collateral, in the form of equity in a property owned by the parent. Additional equity from the parent reduces the risk of loss to the lender in the event of the borrower defaulting.

Other government measures

2.11               The Government has implemented measures to assist FHBs saving for a deposit, including the First Home Super Saver Scheme (FHSSS), announced in 2017. The FHSSS assists individuals to build a deposit for a first home inside their superannuation fund by making voluntary contributions. In addition, the measures the Government has implemented to improve housing affordability, such as the City Deals, encourages additional supply of dwellings which may assist FHBs to enter the housing market. In addition, state and territory governments provide assistance for FHBs by providing grants and offering stamp duty concessions. While these initiatives are helpful for FHBs, saving a sufficient deposit to remove the need for LMI remains challenging.

2. Objective of reform

2.12               Many prospective FHBs have the ability to service a mortgage, however take considerable time to save a 20 per cent deposit. The Scheme aims to facilitate earlier access to home ownership for FHBs without needing LMI.

2.13               When announcing the Scheme, the Government also prioritised other parallel objectives. The Scheme will have a cap of guarantees (10,000 per year) which will limit potential wider market impacts. The Scheme will involve contractual arrangements with a panel of lenders, and smaller banks and non-bank lenders will be prioritised to encourage competition. Additionally, the property price of eligible homes will be determined on a regional basis, to ensure that benefits of Scheme participation are spread across the country.

2.14               It is a central objective to assist FHBs access the market earlier than they would have without needing LMI while maintaining the viability of the LMI market. While lenders’ LMI requirements increase the cost of borrowing faced by many FHBs, it remains a viable and economically important market solution to facilitate high-LVR lending. The LMI industry is concentrated, comprising of three independent providers (QBE, Arch and Genworth) and two ‘captive’ providers that are wholly owned subsidiaries of ANZ and Westpac and supply those entities exclusively. In contrast to other comparable countries, where governments have provided LMI to support access to home ownership, there is no government provider or public support for LMI in Australia.

3. Policy options

2.15               On 12 May 2019, the Government announced that it would implement the Scheme. The announcement included the following policy details:

•        The Scheme will have a cap of 10,000 FHBs each year.

•        The Scheme will enable access to housing finance without the need to save a 20 per cent deposit or pay LMI.

•        Borrowers will face lenders’ usual loan serviceability tests.

•        The Scheme will be available to FHBs with an income (in the prior financial year) less than $125,000 (or $200,000 combined income).

•        Support will be targeted by setting maximum dwelling prices, set on a regional basis.

•        NHFIC will implement the Scheme.

•        The Scheme will commence on 1 January 2020.

Policy design

2.16               Given the Government’s election commitment, alternative policy options are not considered in this Regulatory Impact Statement. In line with the announced policy parameters, it has been determined that the Scheme will provide a first-loss guarantee on eligible loans for the difference between the deposit and 20 per cent of the property purchase price, subject to a minimum deposit of 5 per cent. In the event of default and subsequent claim being made, the lender may claim for amounts owed by the FHB after the sale of the property up to the amount guaranteed. The guarantee will be broadly consistent with the coverage provided by some lenders under parental guarantee products in the existing market.

2.17               To implement the Scheme, NHFIC will contract with a panel of lenders who will have access to the Commonwealth guarantees. NHFIC will not have direct contact with borrowers. Rather, participating lenders or mortgage brokers will assess Scheme eligibility alongside normal considerations such as loan serviceability tests. In the event of a default, the lender will liaise with NHFIC to access the guarantee.

2.18               An alternative model would offer the Commonwealth guarantee product to lenders on the same terms, however with a different application process.  Under this model, borrowers apply to NHFIC directly to confirm eligibility. Approved borrowers then approach a participating lender (directly or via a mortgage broker) to obtain the loan.

2.19               More specific implementation details will be determined and announced by the Government and NHFIC prior to the commencement of the Scheme.

Analysis of policies in other jurisdictions

2.20               The proposed model for the Scheme shares some objectives with initiatives implemented in other jurisdictions. Australia is relatively unique in having an active market for LMI without government intervention. For example:

•        In the United States, loans insured by the Federal Housing Administration (FHA) made up approximately 17 per cent of all mortgages originated in 2017.

•        The publicly owned Canada Mortgage and Housing Corporation (CMHC) controls approximately 40 per cent of the Canadian LMI market. Premiums paid by borrowers recover CMHC’s costs.

•        In New Zealand, the publicly owned Housing New Zealand issues Welcome Home Loans, where LMI premiums are shared between borrowers and the government.

2.21               Other jurisdictions have supported high-LVR lending in other ways:

•        The Western Australian Government offers Keystart Loans, which are high-LVR loans designed to assist borrowers until they have built sufficient equity to refinance. Borrowers face relatively high interest rates on these loans to encourage them to refinance out of the program once they have built sufficient equity.

•        The United Kingdom offered a Mortgage Guarantee Scheme between 2013 and 2016 which guaranteed high LVR loans offered by private lenders. The program was discontinued when lenders were prepared to offer these loans without government support.

4. Impact analysis

First home buyers

2.22               The Scheme will have a cap of 10,000 guarantees each year. The recipients will be able to access a high-LVR loan without needing LMI or alternative products (LMI premiums are typically between one and two per cent of the property purchase price). Scheme applications will occur as part of normal loan application processes. Therefore, there will be limited additional effort involved for prospective FHBs seeking a guaranteed loan, compared to applying for a regular mortgage.

2.23               Under the alternative model, where FHBs apply directly to NHFIC to access guaranteed loans, an administrative burden is shifted from lenders to households and NHFIC who would assess applicants against the eligibility criteria. If successful, NHFIC would grant the applicant a time-limited access pass to the guarantee, which they could then use with participating lenders to purchase their first home.  While this will impose an individual regulatory burden, successful applicants to the Scheme will derive a significant benefit. This individual cost has been estimated and is outlined at Table 2.

2.24               Given the limited supply of guarantees, the potential financial benefits for successful applicants, and the relatively high income eligibility thresholds, it is likely that there will be a large pool of eligible FHB, a proportion of whom who may wish to apply for the Scheme. Therefore, a key implementation detail will be how the 10,000 annual guarantees should be allocated. A key demand management measure will be setting dwelling price caps for Scheme access.

2.25               Currently, FHBs purchase approximately 100,000 properties each year. The prospective FHBs who are unable to access the Scheme, or are seeking to purchase a property above the price caps, will remain able to borrow with relatively low deposits (albeit while paying for LMI). The limit of 10,000 annual guarantees will mean little, if any, impact on house prices (see below for further discussion on housing market impacts).

2.26               The Scheme aims to facilitate earlier FHB property purchases, and will likely encourage some FHBs who would have otherwise delayed their entry to the property market and saved a larger deposit. Therefore, these borrowers will start with a relatively smaller equity buffer and may pay more interest over the life of the loan. However, this would be no different if FHBs entered into high LVR loans with either LMI or a parental guarantee. Offset against this, the Scheme should allow FHBs to not require LMI, which is typically capitalised into the loan amount and paid down over the life of the loan. Participation in the Scheme is ultimately a personal financial decision for prospective FHBs.

2.27               The Scheme will not directly interact with other initiatives that assist FHBs, but will complement measures such as the Government’s FHSSS and the FHB grants and stamp duty concessions offered by state and territory governments.

Lenders and mortgage brokers

2.28               The Scheme will benefit the panel of lenders, chosen by NHFIC, as they will be the only lenders eligible to offer guarantees loans. All else equal, lenders selected to form the Scheme’s panel may attract some business away from other lenders, to the extent that participating borrowers would have taken out a loan with a non-panel lender in the absence of the Scheme. However, impacts on the overall lending market are not likely to be significant, as the cap of 10,000 guaranteed loans represent a small portion of the approximately 394,000 loans made in the last 12 months (excluding refinancing). [7]

2.29               Distributing the guarantee via lenders places an administrative burden on these institutions. Before offering guaranteed loans, lenders will need to update their internal systems, and train front-line lending staff, including on how to apply the eligibility criteria. Additionally, mortgage brokers who wish to offer the guaranteed loans to their clients will require training or self-education. There will also be a per-loan regulatory cost to write a guaranteed loan, as the process will involve determining Scheme eligibility and communicating with NHFIC. These regulatory costs have been estimated and are outlined at Table 1 . However, these costs are discretionary. Lenders will choose to participate if they feel that the commercial benefits of participating in the Scheme are sufficient to offset the associated administrative and regulatory costs.

2.30               Under the alternative model (borrower application to NHFIC), the regulatory burden on lenders and mortgage brokers per loan will be smaller, as they will not need to assess Scheme eligibility. However, there remains some additional time to process a guaranteed loan for a certified borrower compared to a normal mortgage. Additionally, start-up educational costs for front-line lenders and brokers will be smaller compared to the other option, since they will not be required to assess borrowers’ eligibility for the Scheme. Costs associated with updates to lenders’ systems and managing potential loan defaults are consistent with the other option. These business costs have been estimated and outlined at Table 2.

2.31               In the event of loan arrears and defaults, lenders will interact with NHFIC to recover any shortfall amounts covered by the Commonwealth guarantee. This is expected to occur infrequently, given lenders will continue to assess credit and serviceability requirements.

Lenders mortgage insurance providers

2.32               The development of the Scheme has prioritised the maintenance of a viable and profitable LMI industry, as LMI enables high-LVR lending and benefits the financial system more broadly. LMI allows potential home buyers the ability to enter the property market sooner than they would otherwise be able to. Without LMI, potential home buyers with deposits of less than 20 per cent would not ordinarily be able to obtain a mortgage. In addition to insuring lenders against the higher risks involved in lending to FHBs, LMI providers also provide a ‘second pair of eyes’ on the loan assessment process. Taken together, this increases the willingness of lenders to lend to FHBs.

2.33               One key consideration is the potential impact on the LMI market. Approximately 23 per cent of owner-occupier loans in Australia are covered by LMI. [8] A large proportion of these LMI covered loans are made to first home buyers. 

2.34               The guarantee under the Scheme removes the need for borrowers to take out LMI. While the scheme would expand the pool of potential FHBs, there is a risk that the guarantee is provided to a FHB who would have otherwise taken out LMI, thereby reducing demand for LMI policies.  Constraining the size of the Scheme is important. The risk of an unconstrained Scheme is a larger impact on the private sector provision of LMI by displacing a proportion of the LMI market and affecting the ongoing viability of the market. The exit of one or more LMI providers would make the LMI sector less competitive, which could increase prices. If the industry became completely unviable, the Government would be faced with the question of whether to directly support high-LVR lending more broadly. Private sector provision of LMI should be supported given the functional market that currently exists in Australia.

2.35               However, the cap of 10,000 guarantees per year and property price caps (to target those purchasing modest properties) will help to limit the degree to which the Scheme displaces demand from potential FHBs who would have otherwise purchased LMI. The Scheme may also displace those that would have otherwise taken out a parental guarantee or alternative products. 10,000 guaranteed loans is relatively small compared to the overall LMI market. [9] It is difficult to predict how the introduction of the Scheme will specifically impact the different LMI provider business models (independent and captive providers), or whether there will be any impact on LMI pricing. However, there will be continued monitoring of the effect of the Scheme on the LMI market.

The importance of the private LMI market

2.36               LMI also plays an important role in the credit creation process. LMI increases confidence for lenders to lend against residential housing assets through the economic cycle and reduces volatility in financial markets. LMI helps lenders manage risks by transferring the risk of borrower default of LMI-covered mortgages to LMI providers (and their global reinsurers). The ability to manage these risks is particularly relevant for smaller lenders, which are generally more geographically concentrated than larger banks and would otherwise find it difficult to manage higher-risk lending.

2.37               Smaller banks also benefit from LMI provision. Under prudential regulations, loans with LMI require banks to hold less capital compared to loans without LMI. Therefore, the absence of LMI would restrain the competitive position of smaller banks compared to larger competitors.

2.38               Finally, LMI contributes to the stability of the Australian financial system by providing the banking sector with a layer of additional private capital to absorb losses, which can be an important buffer for the system during an economic downturn.

Housing market

2.39               The Scheme aims to accelerate home ownership for prospective FHBs who would not ordinarily have been able to purchase a property without LMI or a parental guarantee. Therefore, demand for housing will increase to some extent. However, in the past 12 months, there were approximately 386,000 residential property transactions in Australia. [10] The cap of 10,000 guaranteed loans will represent a small portion of the market overall and is expected to be distributed across the country. Additionally, property price caps will constrain the ability of FHBs to buy properties that are more expensive than they ordinarily would have purchased. It is reasonable to expect that demand from FHBs, incentivised by the scheme, may have a modest impact on prices in some limited locations and at specific price points. The impact of the Scheme on property prices overall, including for housing developers and sellers of existing dwellings, is expected to be negligible.

   Table 1: Regulatory burden estimate of implementing the scheme

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

$2.17

$0

$0

$2.17

 

   Table 2: Regulatory burden estimate of alternative implementation model

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in cost

Total, by sector

$1.14

$0

$0.32

$1.46

2.40               A regulatory offset has not been identified. However, Treasury is seeking to pursue net reductions in compliance costs and will work with affected stakeholders and across Government to identify regulatory burden reductions where appropriate.

5. Consultation plan

2.41               Treasury and NHFIC have conducted broad stakeholder consultations to assist in identifying the issues faced by FHBs, informing the policy implementation design and to understand the likely impacts. Consultations has informed design considerations including the setting of property price caps, the integrity of the Scheme, as well as operational details such as the FHB application process and the relationship between NHFIC and lenders participating under the Scheme.

2.42               Preliminary consultations were initiated in late-May 2019 and involved a large number of meetings with a broad range of stakeholders, including lenders (large and small), LMI providers, industry associations, financial intermediaries, mortgage brokers, housing developers, financial regulators, and consumer advocates. These stakeholders comprise the supply chain for arranging home loans, through which the Scheme is intended to operate, as well as other stakeholders that the Scheme may influence or may influence the Scheme.

2.43               Consultations have not directly involved potential or actual FHBs. However, Treasury and NHFIC have reviewed available research and collected confidential data from stakeholders to better understand the experience of and issues faced by FHBs.

2.44               To complement bilateral engagement with individual institutions and industry groups, the Government established a reference group comprising a variety of stakeholders to serve as a multilateral forum through which to receive confidential feedback. The reference group first convened in July 2019 to discuss key design elements of the Scheme. The reference group also met August 2019 to discuss further implementation details that must be finalised prior Scheme commencement.

2.45               Further consultation will continue on the legislative framework to enable the Scheme. A public consultation process is planned for the proposed amendments to the NHFIC Investment Mandate, which will contain the core implementation principles of the Scheme, including the Scheme’s eligibility and operations.  With the Scheme’s commencement on 1 January 2020, public consultation on amendments to the NHFIC Act was not undertaken.  The amendments to the NHFIC Act operate at a high level and provide broad authority for NHFIC to administer the Scheme.  Consultation on the Investment Mandate enables stakeholders to focus on key aspects of the Scheme. 

2.46               Given the importance of LMI, emphasis will also be placed on continued consultation and monitoring of these insurers to manage the Scheme’s impact on the sector.

6. Option selection and conclusion

2.47               Stakeholder consultations played an important role in supporting implementation of the Scheme. Consultations have so far indicated that:

•        there is broad-based support for the policy objective of supporting FHBs and demand from potential FHBs is high;

•        to make a decision on whether to seek to participate, lenders will require some degree of certainty over their respective allocation of loans;

•        the proposed policy is functionally similar to parental or family guarantees currently used by some borrowers to obtain a home loan;

•        there are some operational pressures that need to be resolved quickly to ensure the Scheme is implemented in an effective and timely manner and that a critical element of the Scheme’s success will be ensuring a relatively seamless experience for FHBs;

•        public understanding of the Scheme is essential and this must be balanced with Scheme complexity;

•        the LMI claims process is complex and typically takes many months to resolve, and not all defaults of home loans covered by LMI lead to LMI claims.

2.48               In particular, consultations have highlighted the important role served by the LMI sector, including supporting the ability of smaller lenders to compete with the major banks and of borrowers to obtain low deposit home loans. Also noted was the challenge in tailoring Scheme access to benefit subsets of potential FHB and to avoid crowding out the LMI sector .

2.49               The Government’s preferred approach is for NHFIC to work with participating lenders, who would be responsible for assessing eligibility for the guarantees subject to the eligibility criteria. This approach will minimise the associated operational costs and risks for the Commonwealth. While the regulatory cost estimate for this implementation model (see Table 1 ) is slightly higher than the alternative ( Table 2 ), the preferred option does not increase regulatory costs faced by individuals. While the cost to business is slightly higher, lenders’ participation in the Scheme is discretionary and will ultimately be a commercial decision.

7. Implementation and evaluation

Property price caps

2.50               A key implementation challenge may be managing potential demand for the Scheme. While the Scheme will be limited to supporting 10,000 guarantees per year, managing demand and targeting those first home buyers in most need of support will make the task of allocating places in the Scheme considerably easier. The annual income thresholds announced for the Scheme ($125,000 for singles; $200,000 for couples) are higher than median incomes and a large proportion of potential first home buyers will qualify against those thresholds.  Setting caps on the value of properties that can be purchased under the Scheme will be a key lever used to constrain potential demand. It will be necessary to set these caps so that only modest properties in regional towns and capital cities can be purchased. This will also help to target access to the Scheme to those first home buyers in more genuine need of assistance. At the same time, the caps will need to be set in such a way that access to the Scheme is reasonably open to potential first home buyers regardless of the city or region in which they live. Caps will be set for each state and territory, with consideration given to median house prices (in both capital cities and outside of capitals), state and territory FHB stamp duty concessions and FHB grants.

2.51               One potential price cap model is to apply a consistent discount to median dwelling prices in each state and territory for both capital cities and outside of capital cities. This model would create caps that are simple to administer but target relatively affordable properties in respective locations. The Government will determine the exact specification of the caps after further industry consultation. The price caps may be updated periodically to ensure they remain appropriate.

Communication strategy

2.52               Industry feedback indicates that the announcement of the proposed Scheme has attracted a high degree of community interest. Some potential first home buyers may be holding off on purchases in anticipation of gaining access to the Scheme when it commences. Early communication of how the Scheme will be made available to first home buyers, including eligibility criteria, will be important to manage the impact of the Scheme on the housing and mortgage finance markets.

Loan and guarantee application process

2.53               Critical to the Scheme’s success will be ensuring that the application and approval process for FHBs wishing to access the Scheme is relatively seamless and transparent. Providing lenders who may wish to participate in the Scheme with early clarity on how the guarantee will operate will enable them to incorporate the Scheme into their existing customer on-boarding processes. The arrangement that NHFIC enters into with participating lenders will ensure that the customer experience and customer expectations are appropriately managed. NHFIC will determine more specific implementation details.

Ongoing monitoring of the housing market

2.54               A key indicator of whether the Scheme has achieved its objectives will be whether the Scheme is able to enable prospective first home buyers to enter the housing market sooner, without having to wait longer to save the requisite deposit. It should operate alongside a viable and profitable LMI industry that continues to support other FHBs’ access to the market.  Maintaining the viability of the LMI industry, as it allows potential home buyers the ability to enter the property market sooner than they would otherwise be able to. An independent review of the Scheme will be undertaken within three years of the Scheme’s commencement to ensure that objectives are being met.



Chapter 3          

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

First Home Loan Deposit Scheme

3.1                   This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

3.2                   This Bill amends the NHFIC Act to establish the framework for the First Home Loan Deposit Scheme. It does this by expanding the NHFIC’s functions to enable it to:

•        provide guarantees to improve access to home ownership; and

•        undertake research into housing affordability, including supply and demand.

Human rights implications

3.3                   This Bill does not engage any of the applicable rights or freedoms.

3.4                   This Bill amends the NHFIC Act to promote first home ownership in Australia without altering the existing objectives of the NHFIC Act. The NHFIC Act enhances the human right to an adequate standard of living. This right to an adequate standard of living includes the right to adequate food, clothing and housing, and the continuous improvement of living conditions as recognised in Article 11 of the International Covenant on Economic, Social and Cultural Rights .

3.5                   This Bill, in promoting first home ownership and the understanding of housing affordability in Australia is compatible with the right to an adequate standard of living.

Conclusion

3.6                   This Bill is compatible with human rights as it does not raise any human rights issues.




[1] Australian Bureau of Statistics (2019), More households renting as home ownership falls .

[2] Reserve Bank of Australia (2017), Housing Accessibility for First Home Buyers .

[3] Ibid.

[4] Reserve Bank of Australia (2017), Housing Accessibility for First Home Buyers .

[5] Ibid.

[6] Reserve Bank of Australia (2017), The Property Ladder after the Financial Crisis .

[7] Australian Bureau of Statistics (2019), Lending to households and businesses (5601.0) .

[8] Productivity Commission (2018), Competition in the Australian Financial System .

[9] Based on ABS lending data and LMI provider data presented in the Productivity Commission report Competition in the Australian Financial System (2018) .