For first-time homebuyers in Australia, saving for a deposit can be a significant barrier to homeownership. Fortunately, two popular options — the First Home Guarantee and the Guarantor Loan — allow buyers to enter the property market without needing to save a large deposit. Here’s a comparison of both options to help you determine which one is better for you.
1. First Home Guarantee (FHG)
The First Home Guarantee is a government-backed initiative designed to help first-time homebuyers purchase a property with a deposit as low as 5%, without the need for Lender’s Mortgage Insurance (LMI). The government acts as a guarantor, covering the gap between the buyer’s deposit and the required 20% equity.
Key Features of the First Home Guarantee:
- Deposit: Buyers only need to save 5% of the property’s value, reducing the initial financial burden.
- Lender’s Mortgage Insurance (LMI): The government guarantees up to 15% of the loan, meaning you won’t have to pay LMI, which can save thousands of dollars.
- Eligibility: To qualify, you must be a first-time buyer, meet income and property price caps, and plan to live in the home.
- Availability: The First Home Guarantee is available on a limited basis, with a set number of spots each year.
Pros of the First Home Guarantee:
- Government-backed: The government guarantees part of your loan, making it a low-risk option for both the lender and the buyer.
- No LMI: Buyers avoid the significant cost of LMI, which is often required when borrowing more than 80% of the home’s value.
- Lower deposit requirement: A 5% deposit is much more achievable compared to traditional deposits of 20%.
Cons of the First Home Guarantee:
- Limited availability: The scheme is capped each year, meaning only a certain number of buyers can access it.
- Income and property limits: The eligibility criteria can be restrictive, with income and property price caps limiting who can access the guarantee.
2. Guarantor Loan
A Guarantor Loan involves a family member, typically a parent, using their property as security for the loan. This allows you to borrow 100% of the property’s value, eliminating the need for a deposit altogether. The guarantor is responsible for the loan if you default, so it’s important that both parties fully understand the risks involved.
Key Features of a Guarantor Loan:
- Deposit: No deposit is required, as the guarantor’s property is used as collateral for the loan.
- Guarantor’s Role: The guarantor secures the loan by offering their property as collateral, essentially guaranteeing the repayment of the loan.
- Eligibility: No specific government criteria apply, but the guarantor must have sufficient equity in their property to cover the loan.
Pros of a Guarantor Loan:
- No deposit needed: This is ideal for buyers who struggle to save a deposit but have strong financial capacity to make repayments.
- No LMI: Like the First Home Guarantee, a guarantor loan typically eliminates the need for LMI.
- Greater flexibility: There are no income or property limits imposed by the government, making it a flexible option.
Cons of a Guarantor Loan:
- Family risk: The biggest downside is the risk to the guarantor. If you are unable to make payments, the guarantor is responsible for the loan, which can strain family relationships.
- Financial pressure: The guarantor must have significant equity in their property to secure the loan, which can place financial pressure on them.
- Long-term commitment: The guarantor is tied to the loan for the duration of the mortgage, which can complicate their own financial plans.
Which Option Is Better?
The best option depends on your individual situation and financial circumstances.
- First Home Guarantee is a great option if you want to buy a home with a low deposit (5%) and avoid LMI, and you meet the eligibility criteria. It’s a safer choice as it involves less risk for your family and no need for a guarantor.
- Guarantor Loan might be the better choice if you cannot meet the criteria for the First Home Guarantee or if you have a family member willing to help you secure the loan. However, it comes with greater risks for the guarantor and may not be ideal if you don’t want to put a family member’s assets at risk.
Conclusion
Both the First Home Guarantee and Guarantor Loan offer viable pathways to homeownership without a large deposit. The First Home Guarantee offers the advantage of government backing, but with limitations on eligibility, while a Guarantor Loan provides greater flexibility but comes with added risks for the guarantor. Carefully assess your financial situation and consult with a mortgage broker to determine which option suits your needs.