Australian Government 5% Deposit Scheme
As of October 1, the Australian Government's Home Guarantee Scheme has expanded, offering more first homebuyer opportunities across a wider range of properties. While this initiative aims to assist more individuals in entering the property market, it may not be the optimal solution for everyone.
How the Scheme Operates
The Home Guarantee Scheme facilitates homeownership for eligible first homebuyers by allowing them to purchase a home with a 5% deposit, waiving the need for Lenders Mortgage Insurance (LMI). Housing Australia acts as a guarantor, enabling lenders to approve loans up to 95% of the property's value without LMI.
The government's role is to guarantee the lender in the event of a mortgage default, rather than providing direct financial assistance to the borrower.
Eligibility Criteria
To be eligible, first homebuyers must be Australian citizens or permanent residents, at least 18 years of age, and intend to live in the purchased property.
Key Changes Effective October 1
- Income Limits Removed: Income restrictions for applicants have been lifted.
- Unlimited Availability: There is no longer a cap on the number of available spots in the scheme.
- Increased Property Price Caps: The maximum property values eligible under the scheme have been raised.
Advantages of the Scheme
The elimination of LMI represents a significant advantage for first homebuyers, particularly with the removal of limits on the number of participants.
LMI can be a substantial cost for borrowers without a 20% deposit. For instance, purchasing a $1 million property with a 5% deposit could incur approximately $39,924 in LMI, according to fee estimators.
The scheme aims to create a more equitable environment for first homebuyers, especially those without parental guarantees, while also enabling them to save on rent, enter the market sooner, and gain a sense of security.
Potential Risks
Low deposit home loans carry inherent risks. Borrowing at maximum capacity can create financial strain if unexpected expenses arise, potentially leading to mortgage stress.
Refinancing with a different lender may be challenging unless a 20% deposit is available, as the new lender will likely require LMI, offsetting any potential savings from switching.
Negative equity is also a risk if property values decline. Furthermore, larger loan amounts result in higher interest payments over the loan's duration.
For example, a buyer taking out a $950,000 loan (5% deposit) versus an $800,000 loan (20% deposit) on a $1 million property at a 5.50% variable interest rate would face an initial monthly repayment difference of $852 and an estimated $148,268 in additional interest over the life of the loan.
However, these figures do not account for rent saved or potential capital gains from entering the market sooner.
Who Might Not Benefit?
The Home Guarantee Scheme is not suitable for those planning to rent out their property, as lenders may impose penalties or revoke the loan if the property is used as an investment.
It is also not ideal for low-income earners in expensive housing markets who may struggle to service the required loan amount.
While the scheme opens doors for higher-earning first homebuyers with minimal deposits, those with average incomes may still find homeownership unaffordable.