- Keystart provides easier entry costs into the home market in WA
- Deposits from as low as 2% exist
- Are there unintended consequences of this loan scheme, asks Trent Fleskens
Keystart was established in 1989 to provide low-deposit home loans to West Australians unable to meet the deposit requirements from mainstream lenders.
Since then, Keystart has helped more than 100,000 West Australians, who perhaps never thought they would be able to own their own home.
It was set up to act as a step ladder for its clients to get into homeownership by buying established homes in an established suburb with 2% deposits, then letting market fundamentals of demand and supply do their job. When prices rise, the equity in the home will grow to above 20% and will allow the client to refinance out to a traditional lender at a lower interest rate.
For over two generations now, the WA government has been backing homebuyers who otherwise haven’t demonstrated the capacity or willingness to save what other banks consider to be a prudent amount required to securitise a home.
Because the loan is backed by the Government, there is also no Lenders Mortgage insurance payable, meaning clients can save up to $15,000.
Nowhere else in the country does this product exist.
There are some drawbacks to this, however. Interest rates are set at the average of the standard variable rate of the big 4 banks. This is without the 1.5% discount those banks offer all clients just for signing on. So when rates are currently below 2.5% for most owner-occupier applicants of the big 4, Keystart charges 4.54% for their one and only variable loan product. This is a rate most would scoff at today.
Moreover, Keystart’s main function has been ‘frankensteined’ by the building industry to act as a gravy train for new house-and-land construction on the urban expanses where house prices are fundamentally at their most vulnerable due to the fact demand can never outstrip supply.
Concerningly, in the suburbs where Keystart is receiving and approving most home loans, house values in suburbs like Baldivis and Ellenbrook have come off over $100,000 in most cases, and that’s if you can sell your house within a reasonable timeframe.
Baldivis (postcode 6171) Asking Prices fall 2010-2020. Source: SQM Research
A recent article even named Baldivis as the mortgage stress capital of Australia. These issues end up leading to systemic social welfare and safety issues when people are pushed to the brink. Not only is that an issue personally for young families, but it’s also a fundamental reason why house prices wouldn’t go up anyway.
It’s a never-ending spiral into debt and poverty somewhat like what the American GFC did to people in their mortgage belt.
Who is at fault here?
A few people and organisations own this situation.
The customer’s idealistic ownership goals may bear little understanding or credence to basic investment and market fundamentals. Too much, they focus on the glossy marketing packages of the building company ready to overcapitalise their first home.
Keystart also has not identified the massive oversupply of similar housing on its books and has laid the foundations for Perth’s future generation of low-socioeconomic centres. Where are the blacklisted postcodes? Where is the greater scrutiny on house-and-land package valuations?
And finally, and for me, most culpably, it is the house-and-land sales rep whose only incentive is to tend to the wishes of the customer as long as it fits in the servicing capacity their in-house broker ascertained as part of the sign-up process.
Where is the regulatory framework requiring facilitators of first-home constructions to ensure they are providing customers with housing and finance products in locations that are actually suitable and won’t put them in undue risk of default or negative equity?
And as alarmist as this sounds, I don’t write this to scaremonger. I write this so that future customers of Keystart harness the product for the right reasons, with the right timing, and the right type of purchase so that the product can provide the outcome it was intended to provide way back when it was first created.
In my next article, I will run through a solution to this issue…