First Home Guarantee Scheme - How does it work?

What is the Government 5% Deposit Scheme

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 (+ funds for costs) and are buying in NSW for $900,000.

With the Scheme	Without the Scheme
$900,000 purchase price	$900,000 purchase price
+ $19,960 NSW Stamp duty (concessional rate)	+ $19,960 NSW Stamp duty (concessional rate)
+ $3,600 legal and miscellaneous costs	+ $3,600 legal and miscellaneous costs
- $113,560 deposit available	- $113,560 deposit available
= $810,000 loan required	= $810,000 loan required + LMI added to loan of $19,000 = $829,000 total loan
No LMI would be payable (government guarantee amount $90,000)	LMI $19,000
Current interest rate from 6.15% pa	Current interest rate from 6.70% pa (0.55% - 0.75% higher on average)
Repayments over 30 years would be $4950 / month	Repayments over 30 years would be $5349 / month

 

Summary

The first home buyer using the scheme needs to borrow $19,000 less (no LMI) and their repayments would be $399/month less equating to a $23,940 savings over the first 5 years of the loan.

To access the Scheme, you need to meet eligibility criteria, including:

• Australian citizen or permanent resident, at least 18 years old
• saved a minimum deposit of 5%
• a first home buyer or have not owned a property or land in Australia in the last 10 years
• buying a home in Australia priced at or below the location's price cap
• planning to live in the home as an owner-occupier (no investment properties)
• applying for an owner-occupier home loan with Principal and Interest repayments from a Participating Lender, up to 30 years
• applying on your own or jointly with one other person (partner, friend, or family member).

You must also meet your Participating Lender's credit policy and loan approval criteria. Even if you are eligible for the Scheme, you may not get a home loan if you do not meet the lending requirements of your Participating Lender

You must also meet your Participating Lender's credit policy and loan approval criteria. Even if you are eligible for the Scheme, you may not get a home loan if you do not meet the lending requirements of your Participating Lender

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, 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.