To help more Australians get into the property market faster, the federal government has added 40,000 new places to the Home Guarantee Scheme effective 1 July.
The expanded scheme includes 35,000 places each financial year to support first-home buyers to buy a home with a deposit as low as 5%.
Meanwhile, 5,000 places will be added every financial year to support single parents with dependents to purchase a home with a deposit for as little as 2%, known as the Family Home Guarantee.
Here are important pointers you need to know about the First Home Guarantee Loan
1. The government will act as your guarantor
Most mortgage lenders will require a 20% deposit before they will approve a loan.
A low-deposit mortgage is available but most banks will require you to buy a lender’s mortgage insurance (LMI), which can be expensive.
LMI is a type of mortgage insurance that you need to pay but protects the interest of the bank.
Therefore, if you want to purchase a $900,000 home, you need $180,000 in the bank to get approval.
However, you still need to take care of other costs such as stamp duty and other expenses associated with taking a mortgage.
So the expanded scheme is a relief because it can reduce the burden of high deposits and expensive LMI.
The federal government is acting as a guarantor so you can buy your home even with a low deposit.
2. The scheme has income and property price limits
The federal government placed caps on individual income and the property value. The income limit is $125,000 per annum for individuals and less than $200,000 per annum for couple.
The term limit is 30 years and the borrower should be an owner-occupier.
The property value should be within the limit of the postcode where you are purchasing as shown in the table below from the National Housing Finance and Investment Corporation.
3. Your loan may carry higher interest rates
While banks are generally happy to lend you under the expanded scheme, your lender may still classify you as a high-risk borrower because of the low deposit and high loan-to-value ratio (LVR).
With such a higher risk, your bank may charge a higher interest rate compared to their regular mortgage rates.
Banks think there’s a higher chance that you will default on your loan and by taking that risk, the banks will impose higher rates.
With a higher interest rate, you have to pay more for the whole duration of your mortgage.
4. The scheme may boost property prices
Several housing analysts believe that the expanded scheme can initially boost property prices.
“My issue with the scheme is it does nothing to address the root cause of the problem, which is housing affordability,” said RateCity research director Sally Tindall in an interview with ABC News. “Over the last year, according to the ABS data, we’ve seen the biggest annual rise in property prices [on record] of 23.7 per cent.”
Meanwhile, CoreLogic’s head of research Eliza Owen believes that the scheme may serve to offset any softening of prices in the lower end of the property market, once interest rates start to rise.
“Historically the [first home loan deposit scheme] has been popular, so I imagine this will serve to offset a decline in demand to a small extent, up to the price caps of the scheme,” Ms Owen added. “And [it] could, in some areas, drive up prices at the low end of the market due to the ability of more people to participate in home purchases.”
So while you’ll have the government as a guarantor, your options can still be limited because of price considerations.
5. Negative equity risk
Another risky scenario is falling property values known as negative equity, which happens if the property value falls below the amount of your mortgage.
To put it simply, you might end up owning more than the value of your home.
A Canstar model illustrates a scenario for a Sydney mortgage borrower who placed a $45,000 deposit for a $900,000 property using the expanded scheme. If values fall in line with projections by the National Australia Bank (down by 10% by Q4 2023, the home value will be worth $808,740.
“After taking out an $855,000 mortgage and making regular payments, the buyer would owe $830.534,” the Herald reported. “That would mean the borrower owes $21,794 more than the property value, which is a case of negative equity.”
Should I purchase a property under the First Home Guarantee Scheme?
The First Home Guarantee Scheme is certainly a great initiative by the government, and it can help a lot of Australians.
But just like other financial tools, it has its advantages and disadvantages and you need to carefully review the details before you make a decision.
To help you explore your options, it is best to consult a licensed mortgage advisor who can guide you on the salient points of this government program.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult your mortgage advisor before you make any decision involving your mortgage.