First Home Guarantee scheme not always sweet for borrowers

A home loan shouldn’t be like a box of chocolates – it’s up to you to decide how much debt you get.

Securing a place in the federal government’s First Home Guarantee can feel like winning a golden ticket into Willy Wonka’s factory.

It’s likely to be life-changing, but there’s no guarantee it’s going to be for the better, especially not in the short term.

Much like Wonka’s chocolate bars, the genius is in the marketing. At the start of each financial year, the government releases 35,000 new places to a throng of hopeful first home buyers, desperate to become part of the haves rather than the have-nots of Australian real estate.

The scheme lets you take out a mortgage with as little as 5 per cent deposit without having to pay lenders mortgage insurance, which in some cases can climb as high as $36,000. That’s because the government will step in and guarantee your loan in the event you fail to make the mortgage repayments – a noble gesture, except they’re protecting the bank, rather than you.

The government gets kudos for helping young Australians on to the property ladder, when in many cases, what they’re doing is encouraging them to buy a more expensive property with a smaller deposit.

The First Home Guarantee lets you take out a mortgage with as little as 5 per cent deposit without having to pay lenders mortgage insurance.

To be eligible, you need to earn less than $125,000 as a single person, or $200,000 as a couple. You can team up with your partner, a friend, or a family member of your choosing, as long as neither of you have owned a property for the last 10 years.

The spots can sometimes run out within months, creating a sense of urgency. But before you make a beeline for your nearest bank, stop and take a breath.

Buying your first home is one of the most important financial steps you can take. It’s not something you want to rush. Compare the options and do the sums.

Just because the government, or your bank, says it’s OK to take on a lifetime of debt with a wafer-thin deposit does not automatically make it a good idea. It typically means you’ll be taking on a large debt compared to your income. You could also get stung with a higher interest rate, particularly if you opt for a big four bank. For example, CBA’s lowest variable rate loan is currently 6.24 per cent, but if you rock up with a 5 per cent deposit, expect to pay 7.49 per cent.

While there’s no question the First Home Guarantee has helped thousands of Australians leapfrog off the rental treadmill into a robust equity position within in a matter of years, for thousands of others, it’s been far from perfect.

For example, someone who bought a $700,000 apartment in Sydney at the start of 2021 with a 5 per cent deposit is likely to have seen their equity rocket up to 17 per cent in the last two and a half years, without making any additional repayments.

But if that same buyer bought just 12 months later with a 5 per cent deposit, their wafer-thin 5 per cent deposit is likely to have slid back to just 2 per cent today, while their mortgage costs will have risen by over 50 per cent. It can mean they’re shackled to their guarantor for longer, limiting their ability to rent it out.

Property can be a slow-moving chess game of buying, selling and renovating. If the scheme fits in with your strategy, by all means make the move, but do the calculations before you lock it in, because if the Queen has you cornered, you could be stuck in neutral for a lot longer than you had planned.

Sally Tindall is RateCity’s research director.

Originally published as First Home Guarantee scheme not always sweet for borrowers