What is the Home Guarantee Scheme?

At first glance, the expanded Home Guarantee Scheme looks like a game changer for first-home buyers. Administered by Housing Australia, the scheme has already supported over 230,000 home buyers into the property market, and now more people will be eligible. There are over 30 participating lenders across the country, including major banks and a wide range of customer-owned and regional banks.

But does that mean we should jump into the property market today? 

Below, Domain unpacks the pros and cons of the scheme.

What is the Home Guarantee Scheme?

The Home Guarantee Scheme is a federal government initiative designed to help first-home buyers purchase a home sooner. It allows first-home buyers to buy a property with a deposit of as little as 5 per cent without needing to pay Lenders Mortgage Insurance (LMI). Instead, Housing Australia provides a guarantee to the lender.

LMI is an insurance policy designed to protect the lender from financial loss if the borrower is unable to afford their home loan repayments. It usually kicks in when you borrow more than 80 per cent of a property’s purchase price, and can cost tens of thousands of dollars. 

Originally launched as the First Home Loan Deposit Scheme in 2020, the latest iteration of the scheme is due to kick off on October 1.

What are the key changes coming into effect on October 1?

• The expanded scheme will offer unlimited places
• Previous income eligibility thresholds have been eliminated
• The maximum property values eligible under the scheme have been changed.

What advantages does the revised scheme give first-home buyers?

“Getting the deposit together is the biggest obstacle for most first-time buyers,” says Peter Tulip, chief economist at the Centre for Independent Studies. “The new government scheme makes that substantially easier.”

Removing the cost of LMI not only removes a significant up-front cost, he says, it also shifts the borrowing risk onto the government.

“If house prices keep rising, the buyer makes a lot of money. Whereas, if the housing market turns down, it’s now the taxpayer [who pays].”

With no place limits, any eligible first-home buyer can apply for the scheme without worrying that spots will run out.

Mortgage broker Prakash Rai from homeloanexperts.com.au says this means buyers don’t need to rush into a decision, giving them more time to save their deposit and research the market so that they can find the right property in the right location at the right price.

Under the existing First Home Guarantee, individual applicants are allowed a taxable income of up to $125,000, and joint applicants a combined taxable income of up to $200,000 per year. From October 1, income caps will be completely removed, meaning first-time buyers of any income level will be eligible to access the scheme.

“The income thresholds and property caps were not compatible,” says Rai. “Even the $200,000 income, for a family with two dependants and HECS or a personal loan or a car loan would not allow enough borrowing capacity.”

Finally, in a bid to better reflect rising market prices, property price caps have been significantly increased in all capital cities. For example, in NSW, the cap has risen from $900,000 to $1.5 million, in Victoria, it has increased from $800,000 to $950,000, and in Brisbane, the cap has risen from $700,000 to $1 million.

“This allows more first-home buyers to buy the kind of property they want to live in directly, rather than having to buy and then upgrade,” says Rai. “The cap previously was too low for most people to buy something they really wanted.”

But before buyers tackle an application, it’s important to understand the consequences of buying with a smaller deposit.

What are the disadvantages of the Home Guarantee Scheme in its revised form?

Soren Financial director and mortgage broker Mansour Soltani says buyers need to understand that the smaller their deposit, the greater the interest payments over the life of the loan.

Source: Ourtop10

If you take out a 30-year, 95 per cent LVR (loan to value ratio) on a $1.25 million property repaying principal and interest on a 5.8 per cent interest rate, you’ll pay over $200,000 more in interest when compared to an 80 per cent LVR.

“Buyers can enter the market with nearly $188,000 less cash upfront, however they will pay around $53,000 more in interest in the first five years,” Soltani says.  

Home buyers also need to be aware that they are still responsible for meeting all home loan costs associated with the Home Guarantee Scheme, including, but not limited to, application fees, legal costs, and stamp duty.

“Stamp duty on a $1.25 million property in NSW is currently $50,762,” he explains. “First Home Buyer Assistance Scheme concessions do not apply for purchases above $1 million.”

Numerous commentators believe the scheme will increase competition and drive up property prices, which means first-time buyers will have to pay more from the outset.

Tulip worries that the amended scheme might encourage risky buying and borrowing and/or a housing bubble.

“When you have prices rising quickly … a lot of people are going to think, let’s get in on the action,” he says.

Tulip says he understands that everyone’s circumstances are different, and some people will have strong reasons for buying with a small deposit.

“In particular, if you know you want to settle down and stay in one place for the next 10 or 20 years, then home ownership gives you a security of tenure that renting does not,” he says. “And so for those people, they will be able to get into a home of their own quicker [under this scheme].”