Home Guarantee Scheme: what is changing and how does it work?

Major changes to a popular scheme is about the shift Australia’s housing market forever – and experts warn there are hidden risks to everyone.

From October 1, the Government’s Home Guarantee Scheme will expand to include more first homebuyers and more properties across the country. But while this will create fresh opportunities for those looking to crack the market, it may not be the best option for everyone.

HOW DOES THE SCHEME WORK?

The Home Guarantee Scheme is a national Government scheme that enables eligible first homebuyers to purchase a home using a deposit of 5 per cent without paying Lenders Mortgage Insurance (LMI). Housing Australia effectively acts as a guarantor in order for your lender to waive the LMI on a loan of up to 95 per cent of the property’s value.

“Under this scheme, the government doesn’t lend you any money that you have to pay back,” says Canstar data insights director Sally Tindall. “Instead, what it does is commit to the lender that if the mortgage ends up in default, it will step in.”

MORE: 9 out of 10 Boomers causing Aussie crisis

The scheme helps eligible first homebuyers own their first home by guaranteeing a 5 per cent deposit. Picture: NCA NewsWire / David Swift

WHO IS ELIGIBLE?

First homebuyers must be Australian citizens or permanent residents, at least 18 years old and be buying a property to live in. Currently, applicants must have a taxable income of $125,000 or less for individual applicants or $200,000 for joint applicants.

Property price caps apply in capital cities, regional centres and other parts of each state and territory. Check full eligibility requirements at www.housingaustralia.gov.au/

WHAT ARE THE CHANGES?

From October 1, income limits no longer apply. There will also be no limit to the number of places available on the scheme. The current property price caps will also increase.

MORE: Exposed: Aussie suburbs now under siege

Founder of First Choice Mortgage Brokers Tony Bice. Picture: Supplied

WHAT ARE THE BENEFITS?

Founder and principal adviser at First Choice Mortgage Brokers Tony Bice says saving on LMI comes as a massive boost to first homebuyers – one that will be magnified when spots become unlimited.

“Most borrowers don’t have a 20 per cent deposit, so they incur Lenders Mortgage Insurance,” he says. “Under this scheme, Lenders Mortgage Insurance is actually picked up by Housing Australia.”

Canstar research shows someone buying a $1m property with a 5 per cent deposit could pay about $39,924 in LMI based on Helia’s LMI fee estimator.

“The idea behind the scheme is to help level the playing field between those first home buyers who have a parent that owns property and can act as their guarantor versus those who do not, and on this point, the scheme has absolute merit,” Tindall says.

She says the scheme also allows first homebuyers to potentially save on rent and beat rising property prices by cracking the market sooner, while purchasing “a sense of security.”

MORE: Banks now charge these Aussies $373k extra

Canstar data insights director Sally Tindall. Picture: Tim Hunter.

WHAT ARE THE RISKS?

However, it does have some downsides. Low deposit home loans do come with risks.

“Borrowing at capacity, with very little left in the tank can potentially put you in a rock and a hard place if you hit a bump in the road,” Tindall says, explaining you could be stuck in mortgage prison if times get tough.

“Borrowers typically don’t refinance to a different lender unless they have a 20 per cent deposit, because the new lender will ask them to pay Lenders Mortgage Insurance again and that cost can potentially cannibalise any savings from switching,” she says. “The lower your starting deposit, the more time you’re likely to have to stick with that same lender.”

There’s also the risk of negative equity if property prices go down – plus the more you borrow, the more interest you pay over the life of the loan.

MORE: ‘Horror’ rise of pest taking over Aus homes

Buying with a smaller deposit means you run the risk of being locked in mortgage prison. Picture: iStock

Canstar compared the difference in interest costs between a buyer today taking out a loan for a $1m property with a 5 per cent deposit versus one with a 20 per cent deposit starting on the average RBA new customer owner-occupier variable rate of 5.50 per cent, assuming there is one more cash rate cut.

“As a result, they would take on a loan size of $950,000 instead of $800,000 and pay $852 more a month in their initial monthly repayments,” Tindall says. “The interest over the life of the loan, due to the larger loan size would be an estimated $148,268 extra.”

However, this doesn’t take into account certain variables such as the extra rent paid by someone waiting to save up the full 20 per cent – or capital gains they may miss out on by not buying sooner.

It might be worth discussing your goals and financial situation with a mortgage broker.

WHO DOESN’T IT SUIT?

If you want to rent out your property after a few years, the Home Guarantee Scheme is definitely not for you.

Bice says if you did rent it out, your lender could impose some strict penalties on you, such as charging you the LMI you would have paid had you not been in the scheme.

“In some cases, they may even revoke the loan,” he says. “This is not something where you can go in for a certain period of time and then turn around and decide to flip it into an investment property.”

It’s also not ideal if your income is low and you live in an expensive housing market, because you may not be able to service the loan size you need in order to buy a property.

“It’s opening up the door to higher earning first homebuyers with a minimal deposit,” Bice says. “But for the overwhelming majority of borrowers that are on an income average of about $100,000 or a bit over $100,000, then they’re probably still stuck in that rut where they still can’t afford it.”

MORE: Inside the homes of the AFL’s Grand Final superstars

The post Home Guarantee Scheme: what is changing and how does it work? appeared first on realestate.com.au.