The New Home Guarantee Scheme is an initiative to help enable first home buyers to purchase a home sooner.
This is a Federal Government initiative run by the National Housing Finance and Investment Corporation (NHFIC) and is facilitated by participating banks and lenders.
The objective of the scheme is to give first home buyers the opportunity to purchase a home with a smaller deposit, and avoid paying Lenders Mortgage Insurance.
When the scheme commenced at the start of 2020, places in the scheme were limited. However, the Tax & Superannuation Federal Budget Report has just confirmed that, the number of guarantees under the Home Guarantee Scheme will be increased to 50,000 per year for 3 years from 2022–23 and then 35,000 a year thereafter.
Under the new budget, the guarantees will also be allocated to provide 5,000 places per year to 30th June 2025 for the Family Home Guarantee, and then 10,000 place until this time for a new Regional Home Guarantee that will support eligible citizens and permanent residents who have not owned a home for 5 years to purchase a new home in a regional location with a minimum 5% deposit.
Whilst it is obvious that this initiative will enable people greater access to the property market through assisting them to purchase a home sooner, there are some downsides to the Home Guarantee Scheme.
Within this scheme exits a commercial risk factor due to the low deposit loan. This means that a persons loan size is significantly larger than if they had bought a home with a higher percentage deposit, meaning that they ultimately owe more.
With the lower deposit also increases the amount of interest payable on that loan. For example, taking the current median dwelling value of $728,034 in Australia, a buyer will end up paying approximately $37,000 more in interest if they have 5% deposit rather than a 20% deposit.
The limited number of financial institutions involved in the scheme also means that these lenders can set higher interest rates due to the lack of competition of other lenders.
As a result of the objective of the scheme being to reduce affordability issues, this runs the risk of negative equity. It is possible that a scheme of this kind would put negative pressure on housing prices, reducing their expense. Whilst this is ultimately the aim of the scheme, this can pose a risk to first home buyers as there is potential for the value of their property to fall below the amount that they have borrowed, forcing them into negative equity.
On the contrary, it is also possible that the Scheme could do the opposite and actually drive property prices up due to more people being able to buy homes which works against the objective of the scheme to reduce housing affordability issues.
Therefore, whilst the Home Guarantee Scheme allows buyers to enter the property market sooner, first home owners should exercise caution when relying on the scheme and make sure that they are fully informed of the potential risks of engaging with such a scheme.
If you require further information about the Home Guarantee Scheme and how it might affect you, please don’t hesitate to contact Ben Wong on bwong@marsdens.net.au or (02) 4626 5077 and Peter Crittenden pcrittenden@marsdens.net.au or (02) 4626 5077.
The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.
