A scheme to slash demand for lenders’ mortgage insurance will inflate home prices and make it harder for lower-income earners to buy property, insurers warn.  

From October, the federal government’s expanded Home Guarantee Scheme will allow first home buyers to avoid mandatory LMI if they have saved a deposit of just 5%.

The government expects buyers using the scheme in the first year to avoid about $1.5 billion in bank-imposed LMI premiums.

But Insurance Council of Australia CEO Andrew Hall says the program, while well intentioned, will leave many first home buyers worse off in the first few years.

“It is a concern that an outcome of the [scheme’s] expansion will be price increases greater than what people would have paid in LMI,” he said. “These schemes should be effectively targeted to support people who genuinely need it.”

On a $700,000 home, the guarantee will save a first-time buyer $21,000-$28,000 in LMI but will drive up the house price by $37,100-$69,300, ICA argues. The buyer will therefore be “behind by $16,100 to $41,300”.  

ICA wants asset testing for guarantee recipients, transparent risk reporting and independent assessments and reviews. It says otherwise, the program will mostly benefit people who would still buy without the scheme, meaning the home ownership rate will only rise to 67.2% over five years from 66% today.

“It will generally benefit those who already intended to buy a home using other means – support from parents or saving a higher deposit – and harm those who the HGS was originally designed to help.”

ICA cites research by consultancy Lateral Economics, which estimates expansion of the scheme will lift national property prices by 3.5%-6.6% and bring forward demand from 20,600-39,100 first-time buyers.

Lateral estimates the changes will price out up to 6500 lower-income buyers in the first year. It says the highest price increases will affect homes up to the scheme’s price caps, which will rise to $1.5 million in some cities.

This will “far outstrip any savings from forgoing LMI”, ICA says.

Liberal housing spokesman Andrew Bragg says the expanded scheme is “radical” and exposes taxpayers to “an enormous contingent liability, likely to be tens of billions”.  

“The government is incoherent on housing. It says it wants to cut red tape, but then it wants to become a universal property insurer,” he said.  

"These changes amount to the nationalisation of lenders’ mortgage insurance for first home buyers. They will wipe out the private LMI industry ... Labor’s changes will allow the children of billionaires to be able to spend taxpayer dollars to buy their first home.”

The median home price in Australia is $844,000. The government says the new scheme could cut up to six years off the time it takes to save a deposit, and will save people about $25,000 in mortgage insurance.

“Labor was re-elected with a clear mandate to bring down the deposit hurdle for first home buyers, and we’re delivering,” Prime Minister Anthony Albanese said.