First Home Guarantee – what is it, and can I get one?

 

What is it?

It’s a scheme created by the federal government in partnership with commercial lenders to help first home buyers get into the market with a lower deposit requirement and less costs. To help first home buyers with less than a 20% deposit the government can guarantee part of an eligible borrower’s loan. This means that the first home buyer needs a smaller deposit than typical and doesn’t incur the cost of lenders mortgage insurance which can be more than $25,000 in some cases.

To get the standard loan terms lenders typically require a borrower to have at least a 20% deposit. Lenders will lend to those with less deposit, 10% or 5% for example but this then requires the borrower to fund the cost of lenders mortgage insurance (LMI) which as mentioned can be many thousands of dollars. LMI protects the lenders in case of default NOT the borrower. The interest rates offered for loans where the deposit is less than 20% are also considerably higher than those with bigger deposits.

Using the Guarantee Scheme, a first home buyer can purchase their first home with a deposit of just 5% (plus costs*) and borrow the other 95% from one of the participating lenders in the scheme. The Government would in background guarantee a portion of the loan meaning the lender essentially carries the risk of a standard 80% loan. The first home buyer would avoid paying LMI altogether and should qualify for the lower interest rates offered on standard loans.  A win win for the borrowers and lenders.

The Guarantee Scheme is not a cash payment. The borrower still must be able to afford the loan repayments on the full amount of the loan i.e., up to 95% of the property value. It is however a way around some of the restrictions that have made lower deposit loans hard to qualify for and expensive.  

*NB – costs need to be covered by the purchasers. They can be made up of stamp duty, lenders application fees, conveyancing fees, inspection fees etc. Some state government also offer stamp duty concessions for first home buyers.

 

Example 10% deposit with and without the Home Guarantee Scheme

Let’s compare two scenarios, one using the scheme and one without. Let’s assume the first home buyers qualify under the scheme, have a 10% deposit and are buying in NSW for $700,000.

With the Scheme	Without the Scheme
$700,000 purchase price	$700,000 purchase price
+ $10,400 NSW Stamp duty (concessional rate)	+ $10,400 NSW Stamp duty (concessional rate)
+ $2,600 legal and miscellaneous costs	+ $2,600 legal and miscellaneous costs
- $70,000 deposit available	- $70,000 deposit available
= $643,000 loan required	= $643,000 loan required
The government would provide a guarantee of $83,000 to the lender being the difference between the loan amount of $643,000 and 80% of the property value $560,000	+ $22,000 in lender mortgage insurance (added to the loan) = $665,000 total loan borrowed
No LMI would be payable
Current interest rate would be around 3.35% pa	Current interest rate would be around 4.24% pa.
Repayments over 30 years would be $2834 / month	Repayments over 30 years would be $3268 / month

 

Summary

The first home buyer using the scheme needs to borrow $22,000 less (no LMI) and their repayments would be $384/month less equating to a $23,040 savings over the first 5 years of the loan.

 

Do you qualify for the scheme?

 

The First Home Guarantee eligibility criteria is as follows:

• applying as an individual or couple (married / de facto) 
• an Australian citizen(s) at the time they enter the loan 
• at least 18 years of age 
• earning up to $125,000 for individuals or $200,000 for couples, as shown on the most recent years Notice of Assessment (issued by the Australian Taxation Office).
• intending to be owner-occupiers of the purchased property 
• first home buyers who have not previously owned, or had an interest in, a property in Australia 

So the first question you will be asked is – have you completed your 21/22 tax return? Now that it is after June 30^th and the scheme is live, your 21/22 Notice of Assessment will be a mandatory document required to apply. Once you have this, check to see if your assessed income is below the threshold.

The next thing to consider is the price of the target property. In NSW, the cap is $900k for capital cities and regional centres ie Newcastle, and $750k for other areas. If your target property costs more than this cap, the property will not be eligible for the guarantee.

 

Do you qualify with the lenders?

Once you determine you may be eligible for the Scheme the next step is to see if you meet the lenders requirements. We can help!

 

There are some nitty gritty’s like which lenders are accepting applications (spots are limited), their acceptable property types and what are their various income and savings requirements etc.

 

Next steps

If you would like to know more, please contact us a Mortgage Experts to review your situation and see what the Scheme is right for you.