Borrowers advised to weigh financial implications as Home Guarantee scheme broadens eligibility
The federal government’s Home Guarantee scheme will undergo significant changes from Wednesday, making it easier for first-home buyers to enter the property market with a small deposit. However, industry analysts are advising prospective borrowers to carefully consider the implications of taking on a loan with minimal upfront equity.
Launched in 2020, the Home Guarantee scheme allows eligible first-home buyers to purchase a home with a deposit as low as 5%, while avoiding lenders mortgage insurance (LMI). In this arrangement, the government acts as guarantor for the loan. Ordinarily, buyers with less than a 20% deposit must pay LMI, a cost that can reach tens of thousands of dollars and serves to protect the lender rather than the borrower.
From Oct. 1, several major changes will take effect. The scheme will become uncapped, enabling all eligible owner-occupiers who have not owned property in the past 10 years and possess at least a 5% deposit to apply. Previously, the number of places was limited. Income caps will be removed, allowing higher-earning first-home buyers to participate. The previous thresholds were $125,000 for singles and $200,000 for joint applicants. Property price caps will be raised to reflect increases in house prices. The Regional First Home Buyer Guarantee will be merged into the main scheme.
While the removal of LMI can result in substantial savings, exeprts said borrowers should be aware of the potential drawbacks of purchasing with a small deposit. These include the likelihood of higher interest rates, increased total interest paid over the life of the loan, restrictions on converting the property to an investment while under the guarantee, limited refinancing options until 20% equity is reached, and the risk of negative equity if property values decline.
Despite the expanded eligibility, applicants must still satisfy lenders’ serviceability assessments. Although recent interest rate cuts may assist some buyers, rising property prices continue to challenge affordability.
Analysis from Canstar.com.au indicates that a single person earning the average full-time wage could borrow up to $545,000, enabling a purchase of approximately $573,684 with a 5% deposit (excluding stamp duty and fees). For couples, the borrowing capacity rises to $1,090,000, supporting a property value of $1,147,368. These figures suggest that a single average wage earner would be unable to purchase a median-priced home in any capital city except Hobart and Darwin. Couples on average incomes may be able to afford a median-priced apartment in all capitals, but buying a house remains challenging due to price caps.
Interest rates for small-deposit loans can vary. Some major banks, such as CBA and Westpac, offer standard variable rates to scheme participants with a 5% deposit, though these are not the lowest available. The scheme now includes over 30 participating lenders, with some offering competitive rates.
Research by Canstar.com.au shows that buying a median-priced apartment with a 5% deposit instead of 20% reduces the initial outlay by over $100,000 but increases monthly repayments by $592 and total interest by an estimated $103,111 over the life of the loan. Delaying a purchase to save a larger deposit may not always be advantageous, as property prices could rise further, increasing the required savings and potentially missing out on capital growth.
“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% deposit,” said Sally Tindall (pictured top), data insights director at Canstar.com.au.
“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.
Tindall, however, warned that 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,” she said.
Industry experts recommend that first-home buyers assess their borrowing capacity with multiple lenders before searching for a property, taking into account additional costs beyond the deposit, such as stamp duty, legal fees, and moving expenses.
“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 cleart,” Tindall said. “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.”
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