Unlocking Homeownership: Alternatives To Having A 20% Deposit

Jul 6, 2023

First Home Guarantee (FHG)

What is it?

The First Home Guarantee is an Australian Government scheme designed to help first-time homebuyers avoid paying Lenders Mortgage Insurance (LMI). When you apply for a home loan with a deposit of less than 20% of the property's value, the lender typically requires you to pay LMI. This insurance protects the lender in case you default on your mortgage loan. However, with the First Home Guarantee, the government acts as a silent guarantor, allowing you to avoid LMI.

Benefits of the First Home Guarantee

There are several benefits to taking advantage of the First Home Guarantee scheme:

  1. Avoiding LMI: The most significant benefit is that you can avoid paying Lenders Mortgage Insurance, which can add a substantial amount to your overall loan balance. By eliminating LMI, you can save thousands of dollars in upfront and ongoing costs.

  2. Competitive Loan Rates: When lenders assess your loan application under the First Home Guarantee scheme, they consider it with an 80% Loan-to-Value Ratio (LVR). This lower LVR rate is more competitive compared to rates for borrowers with an LVR greater than 80%. It means you have a better chance of securing a more competitive interest rate on your home loan.

  3. Government as Silent Guarantor: Under the First Home Guarantee, the government acts as a silent guarantor, which means they do not take part in any profits or losses when you sell your property. You retain full ownership and control over your home.

Downside of the First Home Guarantee

While the First Home Guarantee offers many advantages, it's essential to consider the potential downsides:

  1. Property Price Cap: The scheme has a price cap on eligible properties, meaning it is available only for homes within a certain price range. The price cap for Metro Melbourne is $800k.

  2. Limited Lenders: There are only a handful of lenders who participate in the scheme – the upside to this is they are experienced in these types of applications.

 

Family Guarantee

What is it?

The Family Guarantee is a financial arrangement that allows a family member, typically a parent, to use the equity in their own property as security for the first homebuyer's loan. This equity usually comes from an investment property, which lenders prefer, but can be from an owner-occupied one too.

Benefits of the Family Guarantee

The Family Guarantee offers several advantages for both the first homebuyer and their family member providing the guarantee:

  1. Higher Loan Amount: With the Family Guarantee, the first homebuyer can access a larger loan amount by leveraging the equity in their family member's property.

  2. Avoiding LMI: Like the First Home Guarantee, the Family Guarantee can help the first homebuyer avoid paying Lenders Mortgage Insurance. By providing additional security through equity in the family member's property, the need for LMI can be eliminated.

  3. Assistance without Cash Gifts: The Family Guarantee allows parents or family members to assist their loved ones in buying a home without providing a cash gift directly. Instead, they use the equity in their property as security, enabling the first homebuyer to access a home loan without the need for a large deposit.

Downside of the Family Guarantee

While the Family Guarantee can be beneficial, there are a few considerations to keep in mind:

  1. Risk to the Guarantor: The family member providing the guarantee assumes a level of risk by using their property as security. If the homebuyer defaults on the loan, the guarantor may be held liable and could risk losing their property or facing financial difficulties.

  2. Family Relationship and Communication: Entering a financial arrangement with family members can sometimes strain relationships if not properly managed. It's essential to have open and honest communication about expectations, responsibilities, and potential risks before proceeding with the Family Guarantee.

  3. Shared Financial Commitment: Both the first homebuyer and the family member providing the guarantee have a shared financial commitment. Any changes in circumstances or financial difficulties can affect both parties involved.

 

Lenders Mortgage Insurance (LMI)

What is it?

Lenders Mortgage Insurance (LMI) is a type of insurance that protects the lender in case the borrower defaults on their mortgage loan. It is typically required when borrowers have a deposit of less than 20% of the property's value.

Benefits of Lenders Mortgage Insurance

LMI provides several benefits for both borrowers and lenders:

  1. Higher Borrowing Capacity: LMI allows borrowers to access home loans with a smaller deposit. Without LMI, many borrowers would have to save a larger deposit, making it more challenging to enter the property market.

  2. Opportunity for Homeownership: LMI helps borrowers who may not have a substantial deposit to fulfil their dream of homeownership. It provides an opportunity to enter the property market earlier by reducing the barrier of a large deposit.

  3. Faster Loan Approval: LMI can speed up the loan approval process as it provides additional security to the lender. With LMI, lenders may be more willing to approve loans for borrowers with a higher loan-to-value ratio (LVR).

Downside of Lenders Mortgage Insurance

While LMI can be advantageous, it's important to consider the following downsides:

  1. Additional Cost: LMI comes at a cost to the borrower. It is typically added to the loan amount, increasing the overall loan balance and monthly repayments.

  2. Protects the Lender, Not the Borrower: It's crucial to understand that LMI solely protects the lender, not the borrower. In the event of default, the insurer compensates the lender for any losses incurred. The borrower is still responsible for repaying the loan.

  3. Limited Options for Lenders: LMI is often a requirement for borrowers with a smaller deposit. This can limit the choice of lenders, as not all financial institutions offer loans without LMI for high LVR borrowers.

 The First Home Guarantee and Family Guarantee are two options available to first-time homebuyers in Australia to overcome the challenges associated with Lenders Mortgage Insurance (LMI). The First Home Guarantee allows borrowers to avoid paying LMI, while the Family Guarantee enables them to leverage a family member's property as security for their loan. Both options provide opportunities to enter the property market with a smaller deposit.

However, it's important to weigh the benefits against the potential downsides and consider individual circumstances before making a decision. Always consult with and seek professional advice to determine the best path forward for your specific situation.