Taking out a loan is a daunting decision that could change your financial future. Sophie Elsworth explains what you need to know before signing the dotted line.

Scott Morrison’s plan to help first-home buyers afford a deposit has been slammed as “counter-productive at worst”.

A new report from the Grattan Institute warns the only possible outcome from the policy is increased house prices, benefiting the seller at the expense of young property hunters.

It also claims the scheme is unlikely to make a material difference in its current form because it’s limited to 10,000 buyers per year.

“If governments really want to make a difference, they need to stop offering false hope through policies such as first homeowners’ grants, stamp duty concessions or deposit schemes that are well-known to be ineffective,” the report authored by Brendan Coates and Jonathan Nolan said.

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The scheme will allow a group of eligible buyers to purchase a home by paying just a 5 per cent deposit, with the Government lending out the remaining 15 per cent from January 1, 2020.

A cap will be placed on the price of the home, and only singles earning up to $125,000 a year or couples on $200,000 are eligible.

The initiative will allow those covered by the scheme to avoid paying at least $10,000 in mortgage insurance, typically charged when a borrower has a deposit below 20 per cent.

“The scheme is small so it is unlikely to make much of a difference to home ownership rates for young Australians or house prices,” the Grattan Institute report notes.

“But if the scheme were expanded it would prove counter-productive: It would push up prices, benefiting sellers at the expense of first homebuyers while increasing the risks of inappropriate lending at costs to both households and government.

“The scheme is fatally flawed and should not proceed.”

The think tank insists the initiative must remain capped at 10,000 guarantees, reduce the income threshold to $80,000 for singles and $120,000 for couples and limit providing the concession to homes valued at less than $650,000.

“If governments are serious about making housing more affordable, other policies are needed,” the report says.

“The priority should be fixing state land-use planning rules that prevent higher density and therefore make housing so expensive in the first place.

“And the Commonwealth Government should reform housing tax settings that artificially inflate demand for housing.”

SCHEME WILL MEAN MORE DEBT AND HIGH INTEREST

Analysis from comparison site Canstar earlier this year warned the scheme would result in young Australians paying higher interest and being dragged further into debt.

It said someone who bought a $400,000 home with a 5 per cent deposit would pay $300 more in monthly repayments compared with someone who paid a 20 per cent deposit. Under the Government’s first-home-buyer scheme, the borrower in this instance would pay $47,000 more in interest over the life of the loan.

Canstar group executive of financial services Steve Mickenbecker says the scheme will allow buyers to save for a loan much faster.

“But the bad thing is they end up with a loan of $380,000 not $320,00,” he told news.com.au.

“Because the Government’s guaranteeing it, the lender is not going to lose money, but you might find yourself in negative territory within six months of buying a house.”

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