Are First Home Buyer Loans More Risky?
Maia Alfonzetti
[*]
Photo: Witthaya Prasongsin – Getty Images
Abstract
Despite the rate of home ownership in Australia drifting down over recent decades, 2020 saw a
large increase in first home purchases. Given the high level of housing prices and household
indebtedness, this raises the question of whether first home buyer (FHB) loans contribute
disproportionately to financial stability and macroeconomic risks. FHBs appear to be riskier than
other owner-occupiers, at least during the first five years of the loan. They have higher loan-to-
valuation ratios and lower liquidity buffers. While this might suggest FHBs would be more
vulnerable than other borrowers during a negative income or housing price shock, recent
experience indicates that FHBs have been no more likely to report financial stress or be in arrears.
One potential explanation is that FHBs have historically experienced better labour market
outcomes than other borrowers.
Introduction
Over recent years, there has been a build-up of
systemic risks associated with rising and high levels
of household indebtedness. These risks can
threaten the stability of the financial system as well
as macroeconomic stability given the potential for
highly indebted households to amplify economic
shocks (RBA 2021). When assessing these risks,
regulators monitor and analyse trends across
various types of lending. This article focuses on
whether lending to first home buyers (FHBs)
contributes disproportionately to overall systemic
risks.
Housing loan commitments to FHBs increased
sharply over 2020, supported by government
programs aimed at boosting home ownership such
as the First Home Loan Deposit Scheme, as well as
low interest rates (Graph 1). Over 2021, the value of
FHB commitments declined a little as rapid growth
in housing prices made it more difficult for FHBs to
enter the market. Alongside the increase in investor
activity, this saw FHBs’ share of commitments
BULLETIN – MARCH 2022 55
decline to just over 20 per cent of the value of total
housing loan commitments in 2021.
To assess the riskiness of FHB loans relative to other
loans, I used a broad range of metrics at different
stages of the loan life. These metrics informed
whether FHBs could be more at risk of defaulting on
their loans or pulling back on their consumption
during an economic shock than other borrowers.
FHBs typically borrow a much higher share of the
value of the property than other owner-occupiers
or investors, as accumulating a deposit is often their
main barrier to entering the housing market. FHBs
also tend to have lower buffers of liquid assets that
could be used to shield their consumption during a
negative income or expenses shock in the first few
years of the loan. However, FHBs are also generally
at an earlier stage of their career, and so have
historically experienced stronger income growth
and have been no more likely to experience income
loss than other borrowers.
A number of data sources were used to assess the
relative riskiness of FHBs. For timely information on
the characteristics of new FHB loans, I used monthly
data collected by the Australian Prudential
Regulation Authority (APRA) on a ‘best endeavours
basis’ for the largest mortgage lenders and loan-
level data from the Reserve Bank’s Securitisation
System. The Securitisation System contains detailed
data on each of the mortgages underlying
Australian residential mortgage-backed securities,
representing roughly one-third of Australian
mortgages. Household-level survey data from the
Graph 1
Housing Loan Commitments*
Excluding refinancing
6
12
$b
6
12
$b
First home buyer
Other owner-occupier
Investor
2019201620132010 2022
0
12
24
%
0
12
24
%
First home buyer
share of commitments
*
Seasonally adjusted and break-adjusted.
Sources: ABS; RBA
ABS’ Survey of Income and Housing (SIH) and the
Household, Income and Labour Dynamics in
Australia (HILDA) Survey provided a broader range
of FHB borrower characteristics, including financial
stress experiences and labour market outcomes.
[1]
Characteristics of FHBs
FHBs are typically younger than other new owner-
occupiers and investors, although the average age
of FHBs has been steadily increasing over time
(Table 1). In 2017/18, the median age of FHBs (with
loans up to three years old) was 33, which was
around 10 years younger than the median age of
other borrowers with loans up to three years old.
This age gap has been relatively persistent over the
past couple of decades. The rising age of FHBs has
been driven by higher housing prices increasing the
time required to save for a deposit, as well as
demographic factors such as marriage and starting
a family occurring later in life (Simon and Stone
2017). The average time required to save for a
deposit on a median-priced dwelling across
Australian capital cities has continued to rise to be
almost eight years in 2021.
The younger age of most FHBs also means they are
usually at an earlier stage of their career. Consistent
with this, Securitisation System data on loans
originated over the year to January 2022 indicate
that the median gross income at origination of FHBs
was below that of other borrowers.
[2]
More broadly,
owner-occupiers tend to have lower incomes than
investors at origination.
The survey data suggest that FHBs and other new
owner-occupiers were equally likely to be in a
couple household in 2017/18. More timely data
from the Securitisation System show that FHB loans
originated over the past year were less likely to be
joint loans than other new owner-occupier loans.
FHBs have historically been much less likely to have
dependents; more than half of FHBs in 2017/18 had
no dependents, compared with around 40 per cent
of both other new owner-occupiers and investors.
FHBs were also somewhat more likely to be
employed full-time and less likely to be self-
employed. Similar shares of FHBs and other
borrowers purchased in a capital city.
ARE FIRST HOME BUYER LOANS MORE RISKY?
56 RESERVE BANK OF AUSTRALIA
Table 1: Demographic Characteristics of New Borrowers
Share by number
First home buyer
Other owner-
occupier Investor
Median age (years)
(a)
33 43 44
Tertiary education (%)
(a)
62 56 65
Employed full-time (%)
(a)
85 81 78
Couple household (%)
(a)
73 75 80
Average number of dependents
(a)
0.68 1.08 1.06
Self-employed (%)
(b)
9 17 21
Joint application (%)
(b)
55 71 63
Capital city (%)
(b)
76 74 74
Median gross income ($)
(b)
114,000 151,000 189,000
(a) Loans originated in the three years to 2017/18; age, education and employment status are for the household reference person.
(b) Loans originated in the year to January 2022.
Sources: ABS; RBA; Securitisation System
FHBs look riskier than other owner-
occupiers
FHBs are more likely to be constrained by deposit
requirements than owner-occupiers who are not
purchasing their first property, as they have less
savings due to their younger age and no equity in
an existing dwelling to contribute to the deposit. As
such, FHBs typically have to borrow a much higher
share of the value of the property at origination.
Almost 30 per cent of FHBs borrowed at a loan-to-
valuation ratio (LVR) of 90 or more in January 2022,
compared with 7 per cent of other owner-occupiers
and 4 per cent of investors (Graph 2). Unsurprisingly,
the LVR distribution of all outstanding FHB loans in
the Securitisation System is more skewed towards
higher LVRs than other owner-occupier loans
(Graph 3). FHBs therefore have less of a buffer
against housing price falls than other owner-
occupiers and would be more likely to have their
property price fall below the outstanding value of
their loan (i.e. be in negative equity) for a given
decline in housing prices. However, given the
strong housing price growth over recent years, FHB
loans were no more likely than other owner-
occupier loans to be in negative equity in early
2022. The share of new lending to FHBs at high LVRs
has also declined over the past year.
Household survey data show that FHBs historically
had higher levels of debt relative to their income
than other owner-occupiers when they took out
their loans, and therefore had higher debt-servicing
costs for a given interest rate. However, strong
housing price growth in excess of income growth
over recent years has led to the deposit constraint
becoming more binding on loan sizes of FHBs than
in the past. As such, recent FHBs have been less
likely than other new borrowers to have high debt-
to-income (DTI) ratios. In January 2022, FHBs were
equally likely as other owner-occupiers to borrow at
DTI ratios of six up to eight at origination, but they
rarely borrowed at very high DTI ratios of eight or
above (Graph 4). By comparison, investors are much
more likely to have high DTI ratios, as they typically
Graph 2
First home buyer
Other owner-occupier
Investor
<60 60 to <80 80 to <85 85 to <90 90+
0
15
30
%
0
15
30
%
LVR at origination
Distribution of Loan-to-Valuation Ratios*
Share of new lending by purpose, January 2022
*
For the largest ADI mortgage lenders; data provided on a ‘best
endeavours’ basis.
Sources: APRA; RBA
ARE FIRST HOME BUYER LOANS MORE RISKY?
BULLETIN – MARCH 2022 57
have more than one mortgage and tax incentives
discourage them from paying down debt ahead of
schedule. Some repeat buyers take out bridging
loans to finance the purchase of their subsequent
property; almost 30 per cent of lending to non-
FHBs at DTI ratios of eight or more in January
2022 was bridging finance. Lenders may also be less
willing to extend very high DTI loans to FHBs as they
have less credit history than repeat borrowers. The
share of new lending to FHBs at DTI ratios of six or
above has increased a little over the past year.
Another, more direct, measure of debt-servicing
capacity is the net income surplus (NIS). The NIS
refers to the amount of income remaining each
month after covering basic living expenses and
Graph 3
25 50 75 100 125 150
0
1
2
%
0
1
2
%
LVR
Outstanding LVR Distribution*
Share of balances, January 2022
First home buyer
Other owner-occupier
In negative equity
*
Loan balances adjusted for redraw and offset account balances;
property prices estimated using SA3 price indices.
Sources: ABS; CoreLogic; RBA; Securitisation System
Graph 4
First home buyer
Other owner-occupier
Investor
<4 4 to <6 6 to <8 8+
0
20
40
%
0
20
40
%
DTI ratio at origination
Distribution of Debt-to-income Ratios*
Share of new lending by purpose, January 2022
*
For the largest ADI mortgage lenders; data provided on a ‘best
endeavours’ basis.
Sources: APRA; RBA
mortgage payments. Lenders calculate the NIS for
all new borrowers as part of their serviceability
assessment, incorporating various buffers to factor
in future interest rate increases and potential falls in
income. Estimates from household survey data
suggest that FHBs who took out a loan in the three
years to 2017/18 typically had a lower NIS than
other owner-occupiers and investors who took out
loans at a similar time. This implies that FHBs have
less capacity to absorb negative shocks to their
income or expenses than other borrowers, and
therefore may be more likely to face repayment
difficulties or cut back their consumption during a
shock.
Consistent with their tendency to have a lower NIS,
household survey data show that FHBs with loans
up to three years old have also typically had lower
liquidity buffers than other borrowers with loans of
the same age (Graph 5). Liquid assets (e.g. cash)
help households get through periods of financial
stress such as a loss of job. A liquidity buffer is
measured here as the number of months of a
borrower’s disposable income that could be
covered by their liquid assets (including deposits,
shares and bonds). FHBs have generally had less
time to accumulate liquid assets than other
borrowers and, being at an earlier stage of their
career, also typically have lower incomes than other
borrowers in the first few years of the loan life.
However, despite having lower liquidity buffers,
FHBs were no more likely to be liquidity constrained
than other owner-occupiers, with similar shares of
FHBs and other owner-occupiers having liquid
wealth (i.e. liquid assets less liquid debt) that was
below their fortnightly disposable income in
2017/18.
[3]
For indebted households, a key component of
liquid assets is prepayment balances in offset and
redraw facilities. Data from the Securitisation System
show that variable rate FHB loans have lower
starting prepayment balances than other new
variable rate owner-occupier loans on average. This
is unsurprising, as the deposit constraint is generally
more binding for FHBs and so they have less
capacity to put excess funds in an offset or redraw
account in the early stages of the loan life.
ARE FIRST HOME BUYER LOANS MORE RISKY?
58 RESERVE BANK OF AUSTRALIA
While FHB loans appear to be riskier than other
owner-occupier loans at origination, it is also useful
to see if this changes as the loan matures. Data from
the HILDA Survey suggest that FHBs pay down debt
at a similar pace to other owner-occupiers over the
first five years of the loan life, as their median
housing DTI ratio and median LVR decline at a
similar rate over time (Graph 6). Meanwhile, data
from the Securitisation System show that average
prepayment balances of FHB loans remain below
those of other owner-occupier loans for up to five
years. These findings suggest that the relative risk
factors of FHB loans are persistent.
Graph 5
Household Liquid Assets
New borrowers by type, 2017/18*
Months of disposable income, mean
Deposits
Offset
Shares
Other
6
12
months
6
12
months
Share of hand-to-mouth households**
First home buyer Other
owner-occupier
Investor
0
10
20
%
0
10
20
%
*
New borrowers took out a new housing loan in the three years
to 2017/18.
**
Households whose liquid wealth is less than their fortnightly
disposable income.
Sources: ABS; RBA
Graph 6
Housing Loan Characteristics
Indebted owner-occupiers by type and loan age
Median housing DTI ratio
2.5
3.5
ratio
2.5
3.5
ratio
First home buyer
Median LVR
55
75
%
55
75
%
Other owner-occupier
Average prepayments*
0 1 2 3 4 5
2
3
4
years
2
3
4
years
Loan age (years)
*
Sum of offset and redraw balances measured in years of repayments;
excludes fixed-rate loans.
Sources: HILDA Survey Release 20.0; RBA; Securitisation System
FHBs are no more likely to report financial
stress or be in arrears
Despite appearing riskier across a range of metrics,
survey data suggest that FHBs have been no more
likely to report experiencing financial stress than
other owner-occupiers over the loan life. The HILDA
Survey asks respondents a number of questions
relating to financial stress each year, such as
whether they were unable to pay their mortgage
on time, unable to pay their bills on time or had to
miss a meal. In the loan origination year, FHBs were
half as likely as other owner-occupiers to report
making a late mortgage payment (Graph 7). The
share of borrowers making late mortgage payments
broadly increases in the years following the loan
being taken out, as borrowers face a higher
cumulative chance of shocks that may cause
financial difficulty. But the differences between FHBs
and other owner-occupiers with loans of the same
age are small and not statistically significant.
Similarly, FHBs and other owner-occupiers with
loans of the same age were equally likely to report
experiencing three or more financial stress events
unrelated to paying their mortgage. Regression
analysis, which controls for personal characteristics
such as income and household composition, and
loan characteristics such as LVR and loan age,
confirms that being a FHB has no statistically
significant impact on financial stress. Significant
predictors of financial stress include having lower
liquidity buffers, lower levels of income (both of
which are more likely to apply to FHBs), a larger
household size, poorer health or more negative
perceptions of job security.
While making a late mortgage payment can be an
early indicator of default, it may only represent a
short-term liquidity problem. Loan-level data from
the Securitisation System on 90-plus days housing
loan arrears was used to complement the analysis
on financial stress from the HILDA Survey.
[4]
Loans
that are behind on their payments by at least three
monthly contractual payments are more likely to
correspond to borrowers experiencing serious
financial difficulty.
Aggregate arrears rates for FHB loans and other
owner-occupier loans tracked reasonably closely
until the beginning of 2020 (Graph 8). FHB arrears
ARE FIRST HOME BUYER LOANS MORE RISKY?
BULLETIN – MARCH 2022 59
rates then experienced a much sharper drop and
have remained lower since.
Arrears rates are influenced by both changes in the
composition of outstanding loans and time effects
that are common to all loans. The composition of
outstanding loans changes with the shares of loans
of different ages and loans originated in different
years (cohorts). Common time effects on arrears
include macroeconomic or housing market
conditions as well as policy changes relating to how
banks treat loans in arrears. A model that separates
out the effects of the age, cohort and time period of
the loan on arrears was estimated to better
understand trends in FHB arrears rates.
Graph 7
Financial Stress
Share of indebted owner-occupiers by type and loan age
Late mortgage payment
3
6
%
3
6
%
Three or more financial stress events*
0 1 2 3 4 5
0
3
6
%
0
3
6
%
Loan age (years)
First home buyer Other owner-occupier
*
Includes being unable to pay bills on time, unable to heat home, etc.
Sources: HILDA Survey Release 20.0; RBA
Graph 8
202020192018201720162015 2021
0.0
0.2
0.4
0.6
0.8
%
0.0
0.2
0.4
0.6
0.8
%
Mortgage Arrears Rates
Share of balances of owner-occupier loans, 90+ days*
First home buyer
Other owner-occupier
*
Excludes self-securitised loan pools that have been actively managed
to remove loans in arrears.
Sources: RBA; Securitisation System
The drop in arrears rates in April 2020 was driven by
a sharp decrease in the average age of outstanding
owner-occupier loans in the Securitisation System
at this time.
[5]
All else equal, younger loans tend to
display lower arrears rates as they have had less
time to encounter shocks to employment or family
circumstances. The decrease in average loan age
was much more pronounced for FHB loans,
following stronger growth in new FHB lending. Age
effects have since had a stronger downward
influence on arrears rates for FHBs than for other
owner-occupiers, as the average age of FHB loans
has remained lower. The model suggests that after
around five years old, FHB loans become slightly
more likely to be in arrears (after controlling for
cohort and time effects), which makes the
downward influence of rapid growth in new FHB
lending on arrears even more pronounced.
Loans in different cohorts display different arrears
rates, reflecting differences in lending standards or
borrower expectations for future macroeconomic
conditions in the year the loan was taken out. The
model suggests that average cohort effects have
been consistently lower for FHB loans than for other
owner-occupier loans. One potential explanation is
that tighter lending standards have been applied to
FHB loans, which implies that for a given standard of
lending, the quality of FHB borrowers is higher. Kelly,
O’Malley and O’Toole (2014) and Giuliana (2019)
found that FHBs were less likely to default on their
loans in Ireland from 2013 to 2017; they suggested
that banks applied stricter lending standards to
FHBs due to lack of credit history. Another possible
implication of having lower average cohort effects
is that FHBs have more conservative expectations
for future housing price and income growth,
though this would be difficult to prove.
Macroeconomic conditions, which are part of the
common time effects, are important drivers of
changes in arrears rates. For example, periods of
high unemployment or slow income growth can
push arrears rates higher if borrowers experience
income loss and struggle to meet their mortgage
payments. Similarly, weak housing market
conditions make it harder for borrowers to get out
of arrears by selling their property. Estimates of
common time effects have been lower for FHB
ARE FIRST HOME BUYER LOANS MORE RISKY?
60 RESERVE BANK OF AUSTRALIA
loans than for other owner-occupier loans since
early 2020. This suggests that on average FHBs may
have experienced better economic outcomes than
other owner-occupiers through the pandemic.
Without timely survey data, it is difficult to look into
this further at present. It may be the case that FHBs
were more likely to defer their loan repayments
during the pandemic, which would have reduced
the number of FHB loans entering arrears relative to
other owner-occupier loans.
[6]
FHBs have historically had more favourable
labour market outcomes
One possibility for why FHBs have been no more
likely to experience financial stress than other
owner-occupiers despite having higher LVRs and
lower buffers, is that they experienced more
favourable labour market outcomes. Data from the
HILDA Survey show that FHBs experienced faster
income growth than other owner-occupiers on
average for a couple years before and after taking
out their loan. Consistent with this, FHBs were
persistently less likely than other owner-occupiers
of the same loan age to report job insecurity and
more likely to receive a promotion over the loan life
(especially in the year the loan was originated)
(Graph 9). This has meant that while FHBs have
typically started out with lower incomes than other
owner-occupiers at origination, their level of
income has caught up after two to three years.
These results are unsurprising as FHBs are generally
younger and therefore have greater potential for
Graph 9
Job Characteristics
Share of indebted owner-occupiers by type and loan age
Job insecurity
10
12
14
%
10
12
14
%
Other owner-occupier
Promotion
-3 -2 -1 0 1 2 3 4 5
5
10
15
20
%
5
10
15
20
%
Years since loan taken out
First home buyer
Sources: HILDA Survey Release 20.0; RBA
future income growth. Indeed, regression analysis
shows that after controlling for the age of the
borrower, the positive effect of being a FHB on job
security and income growth is no longer statistically
significant. Without timely information on the age
profile of the recent cohort of FHBs relative to other
owner-occupiers, it is unclear whether the trend
towards older FHBs continued or if the above
income findings held during the pandemic. The
better labour market outcomes of FHBs relative to
other owner-occupiers may also be partly explained
if only those who expect strong future income
growth choose to enter the housing market as
FHBs.
With higher debt-servicing burdens and lower
liquidity buffers, FHBs would be more vulnerable to
a negative income shock in the early years of their
loans than other borrowers. However, FHBs have
been no more likely to experience a negative
income shock than other indebted households
throughout the loan life. In particular, the HILDA
Survey suggests they have been no more likely to
report losing their job. FHBs have been less likely
than other owner-occupiers to report income that is
more than 20 per cent below the income they
received in the previous year. This finding is
consistent across a range of indicators of income
loss, though the difference between FHBs and other
owner-occupiers loses statistical significance after
controlling for personal characteristics. There was
also no difference in volatility of working hours
across FHBs and other owner-occupiers.
Overall, the HILDA Survey suggests that FHBs and
other owner-occupiers have historically had similar
probabilities of losing their job or experiencing
partial loss in income or hours worked. As new FHBs
could only be identified in HILDA up to 2018, more
timely survey data is needed to determine whether
these results held during the pandemic. Given the
strong increase in FHBs entering the housing
market over the past couple years, it is possible that
the characteristics of recent FHBs are different from
earlier cohorts.
Conclusion
First home buyer loans appear more risky than
other owner-occupier loans across a range of
ARE FIRST HOME BUYER LOANS MORE RISKY?
BULLETIN – MARCH 2022 61
metrics. They start with higher LVRs and lower
liquidity buffers than other borrowers, which
persists several years after the loan is taken out.
However, FHBs have been no more likely to report
financial stress or be in arrears than other owner-
occupiers. One possible explanation is that FHBs
have historically experienced more favourable
labour market outcomes, including higher levels of
job security and income growth. Overall, there are
some mitigating characteristics that partially offset
the risks associated with FHBs, but it remains the
case that FHBs would be more vulnerable than
other owner-occupiers for a given housing price or
income shock. The risks associated with FHB
borrowers should be weighed against broader
policy aims of housing affordability and accessibility
for FHBs. As more household survey data for the
past couple years become available, further
research can look at whether the characteristics of
FHBs who have taken out loans in recent years have
changed.
Endnotes
References
Black S, B Jackman and C Schwartz (2021), ‘An Assessment of the Term Funding Facility’, RBA Bulletin, September.
Fernandes K and D Jones (2018), ‘The Reserve Bank’s Securitisation Dataset’, RBA Bulletin, December.
Giuliana R (2019), ‘Have First-Time Buyers continued to default less?’, Central Bank of Ireland Financial Stability
Notes 14.
Kaplan G, GL Violante and J Weidner (2014), ‘The Wealthy Hand-to-Mouth’, Brookings Papers on Economic Activity,
Spring, pp 77–138.
Kelly R, T O’Malley and C O’Toole (2014), ‘Do First Time Buyers Default Less? Implications for Macro-prudential
Policy’, Central Bank of Ireland Economic Letter Series, 2014(14).
RBA (Reserve Bank of Australia) (2021), ‘Mortgage Macroprudential Policies’, Financial Stability Review, October.
The author is from the Financial Stability Department. The
author would like to thank Amelia Gao for the analysis of
first home buyer loans in the Reserve Bank’s Securitisation
System, and Natasha Cassidy for her assistance in drafting
this article.
[*]
The SIH household-level data are available every second
year from 2003/04 to 2017/18. FHB households are
identified by a question that asks whether the dwelling
purchased or built in the last three years is the first home
owned. The HILDA Survey is a longitudinal study that has
tracked a panel of around 9,000 Australian households
from 2001 to 2020. Every four years it includes a wealth
module, which collects detailed information on
household assets and liabilities; the latest observation is
for 2018. I followed the method of Simon and Stone
(2017) to identify FHBs in HILDA. This method relies on
responses to the wealth module and so can only identify
FHBs in the year they took out their loan up to 2018.
[1]
Loans in the Securitisation System are not representative
of the entire mortgage market in some aspects. Issuers of
securitisations may face incentives to disproportionately
select higher quality loans to meet credit rating agencies’
criteria. Recently originated loans are also under-
represented due to lags between loan origination and
[2]
securitisation. For more information, see Fernandes and
Jones (2018).
This is the definition of ‘hand-to-mouth’ households from
Kaplan, Violante and Weidner (2014).
[3]
As loans in the Securitisation System tend to be of higher
credit quality, the level of arrears rates in the Securitisation
System is lower than that of the broader mortgage
market, but the trends are similar.
[4]
The sharp decrease in average age followed a significant
increase in the Reserve Bank’s holdings of self-securitised
residential mortgage-backed securities (RMBS) at the
creation of the Term Funding Facility (TFF). The Bank
introduced the TFF as part of its response to COVID-19,
providing $188 billion in three-year funding to banks by
the time the program closed in June 2021. These loans
were backed by collateral, mostly in the form of self-
securitised RMBS. See Black, Jackman and Schwartz (2021).
[5]
APRA offered capital concessions to lenders providing
loan repayment deferrals to COVID-19-impacted
customers for up to six months, with a possible extension
of four months. This meant that the period of deferral did
not need to be treated as a period of arrears for capital
adequacy and regulatory reporting purposes.
[6]
ARE FIRST HOME BUYER LOANS MORE RISKY?
62 RESERVE BANK OF AUSTRALIA
