Increase stamp duty concessions and decrease buffers, FBAA tells Senate inquiry

In its submission – developed with feedback from its finance and mortgage broker members – the industry association said that first home buyers (FHBs) “need special treatment”, regulation needs to be more flexible, and existing duties could be improved to make home ownership more accessible.

Stamp duty changes

The FBAA submission said that stamp duty was the most heavily cited problem for issues relating to property ownership, with the transfer duty having a proportionately larger impact on FHBs and low-income earners.

To help more FHBs enter the property market, the FBAA said that they should be exempt from stamp duty “up to realistic limits based on current house prices” – which, in today’s market – it said would be double what they currently are.

The association also called for a change to stamp duty for existing home owners, too, so that they only pay the duty on the difference between the amount paid for their first home and the amount paid for their next property.

“Stamp duty acts to disincentivise moving. This restricts people trading up from a smaller, cheaper home which could then become available to a first home buyer,” the submission said.

“As people trade up in value, they top up their stamp duty payments. This should be applied at a national level and not state-by-state so that it does not discourage interstate migration.”

Lenders mortgage insurance

Similar to stamp duty, the FBAA is also calling for an examination of lenders mortgage insurance (LMI), suggesting that lenders are already “more than capable of self-insuring against any genuine risk associated with property lending” and saying that the pricing of LMI is “opaque”.

FBAA members recommended that FHBs should be exempt from LMI to put them “on equal footing as those who do not have to meet this additional expense”, given it has a material impact on those with small deposits.

Serviceability buffer reductions

Echoing calls made by other members of the industry, the FBAA has also said that serviceability buffers should be revised so that they respond to rate cycles “in a timely manner”.

“The blanket application of serviceability buffers should be rethought. They have unintended impacts on those trying the enter the market and those seeking to refinance,” the submission said.

Given that the market believes the cash rate is at its peak, the FBAA said serviceability buffers in the current environment need to be reduced to between 1.5 per cent and 2 per cent. This would ensure FHBs can get into market and prevent existing borrowers from becoming ‘mortgage prisoners’ who are unable to refinance, according to the association.

“Lenders already buffer a consumer’s capacity when performing their assessment of unsuitability to comply with the NCCP Act and so borrowers are potentially subjected to buffers on buffers,” the FBAA submission said.

Increase house prices and income brackets for government schemes

The group said that while there are numerous grants and concessions already in place, many of these “have become disconnected from reality” and no longer serve a purpose.

For example, the FBAA said that state and federal grants and concessions – such as the Home Guarantee Schemes – have “failed to adjust to rapidly rising prices and changes to modern household configurations, pushing many young and first home buyers beyond the eligibility criteria”.

“Without recounting the thresholds and the schemes available in each state, we believe is it sufficient to highlight that most state concessions cut out at limits well below the median cost of housing,” it said, echoing broker concerns.

It therefore recommended that these schemes “need to be regularly reviewed and if retained, need to be much more responsive to market conditions”.

Members also said that the use of superannuation for owner-occupied purchases could continue to be explored, while shared equity schemes (such as the Help to Buy scheme currently going through Parliament) were also broadly supported by brokers.

Extended honeymoon rates

The broking association also told the Senate inquiry that lenders could also develop specific FHB products that offer longer-term honeymoon rates.

“Post taking out a loan, there are options to extend discounted rates and fixed rate periods to assist first home buyers to develop good repayment habits. Any and all such concessions can only ever be available once to each home buyer,” the FBAA submission said.

‘First home buyers need special treatment’: Peter White

In conclusion, the managing director of the FBAA, Peter White AM, said: “We are looking to solutions that improve access to young and first home buyers. This requires us to free up supply and to remove barriers to first home buyers. The best solutions are those that improve the ability for first home buyers to compete against other buyers without giving real money (such as grants) that quickly flow through to inflate supply side cost.

“First home buyers need to be recognised and given special treatment. We need to exempt them from requirements that impact the amount of capital they have to apply to a purchase (LMI, stamp duty) and we need to relax loadings and buffers that restrict their forecast capacity to service a proposed loan.

“Lenders need to relax their excessively stringent serviceability requirements by accepting a lower deposit, reducing serviceability buffers and recognising that first home buyers can make spending sacrifices and reduce their expenses to prioritise paying down their home loan. This could only be possible if they can have comfort that they are not at risk of prosecution from ASIC under responsible lending laws.”

Indeed, White said that the regulator’s approach has been “quite inflexible” and does not support lenders making many assumptions about changes a borrower may make to their spending habits after taking out a loan (or recognise that incomes increase over time as workers become more experienced in the workforce).

“To protect themselves, lenders err on the side of caution,” he said.

“This has the effect of reducing borrowing capacity for all borrowers, but it disproportionately impacts those trying to enter the market where their living expenses consume a higher percentage of their income leaving them smaller surpluses with which to evidence capacity to service a loan.”

The FBAA submission comes in response to senator Andrew Bragg’s call asking for brokers to respond to the inquiry earlier this year.

In a podcast interview with The Adviser, the chair of the inquiry said: “The mortgage brokers, I would say, would be the people I’d probably want to hear from the most – as a kind of consumer advocate – here, because they are the people that are closest to the ground in terms of understanding the challenges people face in getting financing.”

The Mortgage & Finance Association of Australia (MFAA) has also lodged a submission – which included eight recommendations – while individual brokers have also sent in their own submissions.

The final report for the Senate inquiry is due by 5 December.

[Related: MFAA sets out 8 recommendations to Senate home ownership inquiry]