As property price growth continues to skyrocket across the country, including in regional areas, single parents may be feeling increasingly locked out of the market.
Saving up for a deposit on a single income is incredibly challenging when you consider wage growth fell to its slowest rate on record last year at 1.2 per cent, while April CoreLogic data shows that national dwelling prices grew 7.8 per cent year-on-year.
Single parent households also have lower home ownership rates than other household types, according to a recent news.com.au article. The article also noted that almost “half of all single-parent families” rent and do not own property, compared to one in four dual-parent families who rent.
However, the 2021-2022 Federal Budget has thrown single parents a lifeline in the form of a tailor-made buyer scheme: The Family Home Guarantee.
What is the Family Home Guarantee?
The Family Home Guarantee (FHG) allows single parents with deposits as small as 2 per cent to be approved for a home loan, with the remaining deposit difference up to 20 per cent covered by the government. For example, a single parent with only a 4 per cent deposit would see the government guarantee the remaining 16 per cent.
This may be incredibly helpful for some would-be buyers, as strict home loan eligibility criteria requires borrowers to typically have a home loan of at least 10-15 per cent to qualify, with a 20 per cent deposit the “ideal” scenario for lenders. This is because a larger deposit showcases a level of financial stability and discipline in a borrower’s savings and reduces the risk that they may default on the loan.
And with the cost of a 20 per cent home loan deposit ballooning into the hundreds of thousands of dollars range – particularly in Sydney and Melbourne – taking this financial pressure off single parents may allow them the chance to purchase property.
Who is eligible for the Family Home Guarantee?
According to the latest Federal Budget, the FHG is available for up to 10,000 single parents with dependent applicants over the next four years.
Applicants must be Australian citizens and 18 years old or older. There is an income cap of $125,000 per household.
The FHG is available from 1 July 2021 and may assist would-be buyers in being approved for a home loan with a deposit as small as 2 per cent.
What are the advantages and disadvantages of the Family Home Guarantee?
The FHG will be crucial in helping single parents to get a foot on the property ladder and secure a home for their family. But it’s important that single parents weigh up the pros and cons of the FHG before considering applying, as there are some risks worth keeping in mind.
Benefits of the Family Home Guarantee
- Boost your home loan eligibility
The most significant advantage of the FHG is that it allows single parents to boost their chances of home loan approval with a smaller deposit amount. Home loan lenders have strict regulations around who they can offer finance to, and having a sizeable deposit is one of the most common criteria that blocks everyday Aussies from nabbing a mortgage.
Not only is a lender more likely to approve a borrower who has a deposit of 20 per cent, but they may be more likely to be offered a more competitive home loan rate. The FHG sees the government act as guarantor on their deposit up to 20 per cent, increasing the single parent’s chance of approval on the loan.
- Avoid Lender’s Mortgage Insurance (LMI)
Similarly to the First Home Loan Deposit Scheme, the FHG allows borrowers to have their smaller deposits guaranteed up to 20 per cent of the value of the property. This allows would-be buyers to avoid paying LMI on their mortgage.
Borrowers are expected to pay this insurance to their lender when their deposit is below 20 per cent, and it can easily climb into the tens of thousands of dollars range depending on the property’s value.
While lenders may allow borrowers to add this cost on to their mortgage, by increasing their loan amount they will increase their ongoing repayments and the amount of interest paid over the life of the loan. The FHG sees the government guarantee the remaining portion of their deposit up to 20 per cent, allowing the single parent applicant to avoid this pesky cost.
Risks of the Family Home Guarantee
- Higher ongoing repayments
Generally speaking, the smaller a borrower’s deposit, the higher their ongoing repayments will be. The government is acting as guarantor on a portion of the applicant’s home loan, but the borrower is still approaching the loan with a deposit of as little as 2 per cent. This means that due to the larger loan amount and interest charges, single parents will be paying significantly more over the life of the loan compared to borrowers with only a 5 or 10 per cent deposit.
RateCity crunched the numbers on mortgage repayments on a $500,000 property over 30 years with a deposit of 2 per cent, versus larger home loan deposit sizes. The research found that borrowers with a 2 per cent deposit were paying significantly more in mortgage repayments.
While this does not mean the single parent applicant should avoid using the FHG, it’s worth keeping in mind that repayments will be higher than if they saved for a larger deposit. However, in the time it takes them to save for a larger deposit, the median dwelling price may have increased as well, often making it a catch-22 decision. Either way, it’s worth running the numbers on a Repayment Calculator to ensure applicants can afford ongoing repayments.
Repayments on a $500,000 property with different deposit sizes
|Deposit size||Loan amount||Monthly repayments||Repayments over first year||Total repayments|
Note: Based on hypothetical home loan scenario of a $500,000 property and loan repayments over 30 years. Figures based on current average owner-occupier principal and interest rate of 2.89%. Total repayments figures are for example only and do not factor in interest rate fluctuations over life of loan. Figures do not factor in fees. Data accurate as of 21.05.2021
What other government assistance options are available?
The First Home Guarantee is not the only government scheme available to support would-be buyers in getting a home loan or reducing the costs of purchasing property
There are a range of government schemes, grants, and concessions available which may differ per state or territory. This includes first home buyer schemes and stamp duty reductions or exemptions.
For more information on the types of government assistance that may be available to you – particularly if you are a first home buyer – please read our comprehensive guide.