Home Guarantee expands from Wednesday – but buyers should weigh up the risks

More first home buyers will be able to get a foothold on the property ladder from next Wednesday, as the government expands its Home Guarantee scheme, however, Canstar is reminding borrowers not to jump into a small deposit loan without consideration.

The scheme, which was introduced in 2020, lets first home buyers purchase a property to live in with as little as a 5% deposit without having to pay lenders mortgage insurance (LMI), with the government acting as the person’s guarantor instead.

Without a guarantor, many lenders will still let first home buyers purchase a property with a 5% deposit, however, the cost of LMI can be prohibitive.

What’s changing from 1 October?

• Unlimited places in the scheme: All owner-occupier first home buyers, or those who have not owned property for the last decade, who have a 5% deposit or more can apply. Previously, the scheme assisted up to 50,000 home buyers, including 35,000 first home buyers, 10,000 regional home buyers and 5,000 single parent home buyers.

• Removing income caps: First home buyers with higher incomes can access the scheme. Previously, the First Home Guarantee income cap was $125k for singles or $200k for joint applicants.

• Higher property price caps: To try and keep pace with soaring house prices.

• Regional First Home Buyer Guarantee to be included in the same scheme for first home buyers.

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Source: Housing Australia

How much are buyers potentially saving from not having to pay LMI?

Buyers who have a deposit of less than 20% are typically required by their bank to pay lenders mortgage insurance (LMI), unless a family member guarantees their home loan. Some banks also reduce or waive LMI for certain professions.

LMI is not a small expense. The cost can easily run into the tens of thousands, and only goes to protecting the bank, not the borrower.

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Source: www.canstar.com.au, Helia. Property prices are from Cotality and are the national median unit and house prices, Aug 25. Based on an owner-occupier first home buyer paying principal and interest with a 30 year loan.

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First home buyer beware

While the scheme opens the door for buyers with just a 5% deposit, it’s important to understand the risks and responsibilities that come with borrowing at this level.

Borrowing with a small deposit can potentially mean borrowers:

• are sometimes charged higher interest rates;

• are likely to pay more interest over the life of the loan;

• can’t move out of the property and turn it into an investment while the guarantee is in place;

• are unlikely to refinance until they have 20% equity in the property; and

• could fall into negative equity if property prices drop.

What can a first home buyer actually afford?

The uncapping of the number of places in the scheme, the removal of the income caps and the increase to the property price caps will make the scheme more accessible to thousands of first home buyers.

However, buyers will still need to pass the bank’s serviceability tests in order to get a loan, and while the three cash rate cuts this year will help achieve this, rapidly rising property prices will not. The real question is how far the average wage will stretch in today’s market.

Canstar’s analysis shows that a single person earning the average full-time wage, as recorded by the Australian Bureau of Statistics (ABS), could potentially borrow a maximum loan size of $545,000. If they have a 5% deposit, they could potentially spend up to $573,684 on a property (excludes stamp duty and fees).

A couple, each earning the average wage, could potentially borrow up to $1,090,000, which, with a 5% deposit, could equate to a property value of $1,147,368.

This is based on a person or couple taking out an owner-occupier loan with no other debts, no dependents and minimum expenses. Borrowing capacity figures are estimates and can vary from lender-to-lender.

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Source: www.canstar.com.au. Based on an owner-occupier taking out a 30-year loan at 5.50% today with annual expenses of $24,000 for singles and $48,000 for couples, 90% of post-tax income available to service the loan and expenses, and a 3% interest rate buffer. Incomes are based on ABS Average Weekly Earnings. Tax calculations based on the current financial year, excluding Medicare Levy. Assumes borrowers have no existing debts, minimal expenses and no dependents. Does not factor in pay rises. Borrowers should seek personal financial advice before deciding how much to borrow. The actual amount will vary depending on their personal circumstances and between lenders.

Based on this analysis, a first home buyer on an average wage would not be able to purchase a median-priced property in any capital city except Hobart and Darwin. A couple, where both earn the average wage, are likely to be able to buy a median-priced apartment in all capital cities, however, buying a house would be more difficult, as the median-priced house is above the property price cap in the scheme in all capital cities.

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Source: www.canstar.com.au. Property prices from Cotality. Assumes a single person on average wage of $104,807 (ABS Average Weekly Earnings) can buy a property at $573,694 with a 5% deposit, whereas a couple can buy $1,147,368. See borrowing power notes in table above.

Canstar also has a borrowing power calculator which may be able to give you a more personalised estimate.

Banks sometimes charge higher rates for small deposits

While some banks, such as CBA and Westpac, offer buyers in this scheme advertised variable rates for deposits of 20%, even if they have as little as a 5% deposit, the rates on offer are still not each bank’s lowest variable rates, which are reserved for online-only customers with bigger deposits.

However, the government scheme has over 30 participating lenders, including G&C Mutual Bank, which currently offers the lowest variable rate home loan on Canstar’s database at 4.99%.

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Source: www.canstar.com.au. Note: Rates above are from the big four banks participating in the government scheme and are for owner-occupiers paying principal and interest with a deposit of 5%. Advertised rates above are benchmarks and can vary on a case-by-case basis.

The cost of taking on a loan with a wafer-thin deposit

Canstar Research shows someone buying the national median-priced apartment today, with a 5% deposit, instead of a 20% deposit, would put down $34,772, instead of $139,088 – a $104,316 difference.

As a result, they pay $592 more a month in their initial monthly repayments. The interest over the life of the loan, due to the larger loan size, would be an estimated $103,111 extra*.

However, waiting to save for a 20% deposit, instead of buying today with 5%, isn’t necessarily the cheaper option. Property prices are likely to rise in this time, which could see the person have to save for an even bigger deposit, and potentially miss out on capital growth. Many would-be buyers will also be paying rent at this time.

Canstar’s Data Insights Director, Sally Tindall says, “The expanded Home Guarantee scheme will open the door for thousands more Australians to get into the property market sooner, but it’s vital buyers understand what they’re signing up for when they purchase with just a 5 per cent deposit.”

“This scheme takes lenders mortgage insurance off the table, which can be a roadblock for many first home buyers. However, that doesn’t make a wafer-thin deposit risk-free.

“A smaller deposit typically means a bigger loan, higher monthly repayments and potentially a higher interest rate. The good news is there are now 38 lenders in the scheme, which provides buyers with a choice of rates.

“While the expansion of this scheme helps put buyers who don’t have a family guarantor on a more even keel with those that do, it isn’t the only hurdle first home buyers have to clear.

“Buyers will still need to pass the banks’ serviceability tests to make sure they’re not taking on impossible levels of debt.

“While this will prevent many from purchasing the property they want, the answer isn’t to make the test easier and saddle them with a debt they can’t afford.

“The reality is, most first home buyers will have to compromise on size, location or both to make that first step into the market.

“If you’re a first home buyer, understand that it’s called a property ladder for a reason and it’s OK to start on the bottom rung.

“For many first home buyers, the scheme could be the key to ownership, but it’s vital to stress-test your budget and borrow only what you can comfortably afford in real life, not just on paper.

“Expanding the scheme and attracting more buyers into the market could backfire for the government. The expected increase in demand is likely to add more fuel on to a red-hot property market, pushing home ownership further out of reach for generations to come.”

Tips for first home buyers

1. Check your borrowing power before you start house hunting. Lenders will assess your income, expenses, and debts differently, so it pays to get an estimate across a few banks and financial institutions to know your price range.
2. Factor in more than just the deposit. Stamp duty, legal fees, inspections, and moving costs can easily add up to tens of thousands on top of your deposit.
3. Look into government schemes. Programs like the First Home Guarantee can help you buy with as little as 5% deposit without paying lenders mortgage insurance, but you’ll need to meet eligibility criteria.
4. Compare loans, don’t just go with your everyday bank. The difference between an average variable rate and a competitive rate can save you hundreds every month—and tens of thousands over the life of the loan.
5. Stress-test your budget. Make sure you can still manage repayments if rates rise, or if your circumstances change, so you’re not caught short. Also, just because the bank is willing to lend you a certain amount of money, do your own calculations to make sure you’re comfortable with the repayments.
6. Think long-term, not just the first step. Buying a property that suits your lifestyle now but also has room to grow could save you from expensive upgrade costs down the track.

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