First Home Guarantee vs Guarantor Home Loan
Takes only 3 minutes
07 Jul, 2023
Updated: 30 Sep, 2024
Deciding between the First Home Guarantee and a guarantor home loan depends on your situation. The First Home Guarantee is ideal if you have a 5% deposit but want to avoid paying Lenders Mortgage Insurance (LMI), as the government essentially guarantees another 15% for your deposit. A guarantor home loan is better if a family member can use their property as security, allowing you to borrow up to 105% of the property value without LMI.
Let’s explore two of the most popular options available for first-home buyers in detail:
- The First Home Guarantee
- Guarantor Home Loans
First Home Guarantee
The First Home Guarantee is a government scheme that is part of the Home Guarantee Scheme. Under this plan, first-home buyers with a deposit as low as 5% can get a home loan without paying Lenders Mortgage Insurance (LMI).
LMI is usually required when a borrower has a deposit of less than 20% or borrows more than 80% of the property value.
With the First Home Guarantee, however, the government acts as a mortgage insurer, so if you have a 5% deposit, the government guarantees 15% of the property value, eliminating the need to pay LMI.
Learn more about the First Home Guarantee here.
Guarantor Home Loan
With a guarantor home loan, a guarantor (usually a close family member) provides additional security for your home loan. The guarantor does not need to pay money but allows their home to serve as security for the loan.
Like the First Home Guarantee, a guarantor home loan allows home buyers to purchase their dream home without paying LMI, even if their deposit is less than 20% of the property value.
Learn more about guarantor home loans here.
Guarantor Home Loan Vs First Home Guarantee
Deciding which one of these options works best for you can be difficult. To make things easier, we’ve compared the two in this chart.
| Characteristic | Guarantor Home Loan | First Home Guarantee |
|---|---|---|
| Definition | A home loan where a guarantor (usually a family member) uses their property as security for the borrower’s loan. | A government scheme that allows home buyers to purchase a home with a smaller deposit. |
| Purpose | To help borrowers with a small deposit or limited credit history. | The scheme was designed to help first-home buyers purchase a home. |
| Deposit requirements | No deposit is required, but you must put aside some money for stamp duty and other fees. | You will need a deposit of at least 5% of the property value. |
| Guarantor’s role | If the borrower defaults, the guarantor is responsible for paying the amount guaranteed. | The government guarantees the difference between the borrower’s deposit and 20% of the value of the property. |
| Eligibility | The guarantor must own property in Australia and have a good credit history, stable income and sufficient equity. | Borrowers must be first-home buyers or people who have not owned property in the last 10 years. Australian citizens and permanent residents can apply. |
| Risks | If the borrower defaults, the guarantor is liable for loan repayment. The guarantor’s credit rating may be affected. | The borrower is still responsible for loan repayment. If they default, the government will not help. |
| Flexibility | Guarantor loans offer flexibility in terms of loan size and property type. These loans are available for first-home buyers, second-home buyers and investors. | There are income caps and property price caps in place. The scheme is only for first-home buyers – and people who have not owned property for a decade – who purchase property as an owner-occupier. |
| Loan amount | Homebuyers can generally borrow up to 105% of the property’s value. | Homebuyers can borrow up to 95% of the property value. |
| Availability | Various lenders offer guarantor loans. | The First Home Guarantee is available only with participating lenders. |
| Benefit | Can help borrowers who lack a large deposit or strong credit history. | Can help eligible first-home buyers enter the property market with a smaller deposit. |
So which is the better option?
Well, that depends on your situation.
If you have a close family member who is willing to become a guarantor for you, the tried and tested method of a guarantor home loan works. A guarantor home loan is not limited to first-home buyers only. There can be circumstances when a second-home buyer can use a guarantor home loan.
As the name suggests, the First Home Guarantee is designed for first-home buyers, although non-first-home buyers who haven’t owned a property in the last decade are also now eligible. To qualify, applicants must also be:
- Australian citizens or permanent residents
- At least 18 years old
- Earning no more than $125,000 for individuals or $200,000 for joint applicants.
We’re Here To Help
Making the right choice might seem daunting, but you don’t have to navigate the options alone. At Home Loan Experts, our trusted mortgage brokers are with you every step of the way. Call us on 1300 889 743 or complete our free assessment form today.
