The Home Guarantee Scheme - benefits and risks
Key benefits of the Home Guarantee Scheme
Homeownership is now more accessible than ever with the Home Guarantee Scheme (HGS). This unique initiative is a game-changer for eligible buyers, making the dream of owning a home a reality.
Let's explore how the HGS can significantly benefit you:
Low deposit requirements:
One of the most significant advantages of the HGS is the ability to buy a home with a much lower deposit. For example, in NSW’s capital cities and metro you can purchase a property valued at up to $1,500,000 with just a 5% deposit. This means you only need $75,000 instead of the standard 20% deposit, which would be $300,000. For single parents under the Family Home Guarantee, this can be as low as 2%, reducing the initial financial burden significantly.
The elimination of Lender's Mortgage Insurance (LMI):
LMI can be a considerable expense for those with smaller deposits, but under the HGS, this cost is waived. For example, if you are buying a $1,500,000 property and had a 10% deposit ($150,000), the LMI would typically cost $36,480 – a fee that is completely removed with the HGS and without LMI costs capitalising on the loan, your repayments will also be lower.
Competitive interest rates through tiered pricing:
Another perk of the HGS is the access to competitive interest rates through tiered pricing. Banks usually charge higher interest rates for loans with higher Loan to Value Ratios (LVRs). However, under the HGS, your loan is treated as if you have a 20% deposit, even if it's only 5%. This arrangement means you can enjoy lower interest rates, like to those with larger deposits, leading to substantial savings over the life of the loan.
The HGS is a strategic way to maximise your savings and reduce the financial hurdles of buying your first home. At Buyvest, we're committed to helping you navigate this journey, ensuring you benefit from every aspect of the scheme. Whether you're a first-time buyer or a single parent ready to take the jump into homeownership, we're here to provide expert guidance and support.
Risks of the Home Guarantee Scheme
The Home Guarantee Scheme (HGS) is a beneficial initiative for many aspiring homeowners, but it's essential to be aware of its potential drawbacks.
Here's a closer look at the risks involved:
High Loan-to-Value Ratio (LVR):
The HGS enables you to borrow up to 95% or 98% of your property's value, leading to a smaller deposit requirement. However, this also translates into a larger loan and potentially higher monthly repayments. It's crucial to evaluate your financial capability to handle these increased repayments before proceeding with a high LVR loan.
Risk of negative equity:
A significant concern with high LVR loans is the risk of negative equity. This situation arises when your property's market value drops below the outstanding loan balance. If you're forced to sell under such circumstances, the sale might not cover the entire loan, resulting in residual debt.
Postcode limitations:
The HGS comes with specific property price caps, varying based on the property's location. It is important to check that your loan provider doesn't have any postcode restrictions. Therefore, some postcodes might be ineligible for the scheme, or you might need a higher deposit for certain areas. Before settling on a property, ensure it falls within the eligible price range for the HGS in your chosen location.
Valuation shortfall:
A valuation shortfall occurs when the appraised value of a property is less than the purchase price. This can be a significant risk, especially if you're relying on a high LVR loan. In this scenario, you might need to renegotiate the price, provide additional funds to cover the gap, or even reconsider your property choice.
In summary, while the HGS can open doors to homeownership with reduced initial costs, it's vital to approach it with a full understanding of the associated risks. At Buyvest, our mortgage brokers are here to guide you through these complexities, ensuring that you make well-informed decisions.
Frequently asked questions about the Home Guarantee Scheme
What is the difference between the Home Guarantee Scheme and Lenders Mortgage Insurance?
The Home Guarantee Scheme is a government initiative that guarantees a portion of your home loan, allowing you to purchase with a smaller deposit without paying Lenders Mortgage Insurance. LMI is an insurance policy that protects the lender if you default on your loan when borrowing more than 80% of the property value. The HGS effectively replaces the need for LMI, saving you thousands of dollars in upfront costs.
Can I use the Home Guarantee Scheme for an investment property?
No, the Home Guarantee Scheme is specifically designed for owner-occupiers. You must intend to live in the property as your principal place of residence. However, under a Buyvesting strategy, you could potentially convert the property to an investment after living in it for the required period (typically 12 months), though you should seek financial advice about the implications of this approach.
How many places are available under the Home Guarantee Scheme each year?
The number of places available under the Home Guarantee Scheme varies each financial year and is announced by the government. Typically, tens of thousands of places are released annually across all three guarantee options. These places are allocated on a first-come, first-served basis, so it's advisable to apply early in the financial year.
What happens if property values fall and I end up in negative equity?
If property values decline and you end up in negative equity (owing more than the property is worth), you're still obligated to repay the full loan amount. This situation primarily becomes problematic if you need to sell the property. To mitigate this risk, consider purchasing in areas with strong growth potential and plan to hold the property long-term if possible.
Can I buy any property with the Home Guarantee Scheme?
No, properties must fall within the price caps set for your location. These caps vary by state/territory and between capital cities and regional areas. Additionally, the property must be residential (not commercial) and suitable for use as your principal place of residence. Some lenders may also have postcode restrictions for high-risk areas.
Do I need to be a first home buyer to use the Home Guarantee Scheme?
No, For the First Home Guarantee and Regional First Home Buyer Guarantee, you must be a first home buyer or haven’t owned a home in the last 10 years. The Family Home Guarantee is available to single parents with dependents regardless of whether they've previously owned property, provided they don't currently own property and meet other eligibility criteria.
How long do I need to live in the property purchased under the Home Guarantee Scheme?
The scheme requires you to move into the property as your principal place of residence within a specified timeframe (typically 6 months) of settlement. While there's no explicit minimum period you must live there, changing the property to an investment will require you refinance the property out of the scheme and if your loan to value ratio is higher than 80% then Lenders Mortgage Insurance will be applicable.
Can I refinance a loan under the Home Guarantee Scheme?
Yes, you can refinance a loan under the Home Guarantee Scheme, but there are considerations:
- If refinancing with less than 20% equity, you may need to stay with a lender participating in the scheme
- If you've built up 20% or more equity, you can refinance with any lender without restrictions
- Refinancing may affect the guarantee, so it's important to discuss options with our experts at Buyvest
What if I'm not eligible for the Home Guarantee Scheme?
If you're not eligible for the Home Guarantee Scheme, alternative options include:
- Saving for a larger deposit to avoid or reduce LMI costs
- Exploring state-specific first home buyer grants and concessions
- Considering a guarantor loan where a family member provides additional security
- Looking into shared equity schemes where available
- Investigating professional-specific lending programs that may waive LMI
How does the Buyvesting strategy work with the Home Guarantee Scheme?
The Buyvesting strategy involves:
1. Purchasing a property as an owner-occupier using the Home Guarantee Scheme with a 5% deposit
2. Living in the property for the required period (typically 12 months)
3. Eventually converting the property to an investment by refinancing and then renting it out
4. Potentially purchasing another property as your new primary residence
This approach allows you to enter the market with minimal upfront costs while building a property investment portfolio. The strategy takes advantage of first home buyer benefits, avoids LMI, and may provide tax advantages through the 6-year rule for capital gains tax purposes.
Reach out to us at Buyvest, your local mortgage broker, to learn more about how we can help you make the most of this fantastic scheme.
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Homeownership made easier with the Home Guarantee Scheme.
Start your journey with a low deposit and no LMI costs.
Important stuff:
Please note that the views and opinions expressed in this post are general information only, and this is not financial advice.
Any advice and information is provided by Buyvest Pty Ltd ABN 91 684 841 496, Australia Credit Licence No. 567392 and is general in nature, for educational purposes only and is not intended to constitute specialist or personal advice. This website has been prepared without considering your objectives, financial situation or needs. Therefore, consider the appropriateness of the advice for your situation and needs before taking any action. It should not be relied upon to enter into any legal or financial commitments. Specific investment advice should be obtained from a suitably qualified professional before adopting any investment strategy. If any financial product has been mentioned, you should obtain and read a copy of the relevant Product Disclosure Statement and consider the information contained within that Statement concerning your circumstances before deciding whether to acquire the product. You can obtain a copy of the PDS by emailing hello@buyvest.com.au. If you want to change your financial circumstances, such as applying for a loan, all loan applications are subject to credit approval.
All information on this website is subject to change without notice.
