The Single-Parent Homebuyer Diet: What You Need to Know
As real estate price growth continues to soar across the country, including regional areas, single parents may feel increasingly excluded from the market.
Saving for a single income deposit is extremely difficult when you consider that wage growth fell to its slowest pace on record last year at 1.2%, while CoreLogic data for April shows that national house prices increased 7.8% year over year.
Single-parent households also have lower homeownership rates than other types of households, according to a recent news.com.au article. The article also notes that nearly “half of all single-parent families” rent and do not own property, compared to one in four two-parent families who rent.
However, the 2021-2022 federal budget threw a lifeline for single parents in the form of a tailor-made homebuyer program: the Family Home Guarantee.
What is the Family Home Guarantee?
The Family Housing Guarantee (FHG) allows single parents with deposits as low as 2 percent to be approved for a home loan, with the remaining deposit difference of up to 20 percent by the government. For example, a single parent with only a 4 percent down payment would see the government guarantee the remaining 16 percent.
This can be extremely useful for some potential buyers, as strict eligibility criteria for home loans require borrowers typically have a home loan of at least 10-15% to qualify, with a 20% deposit being the scenario. “Ideal” for lenders. . This is because a larger deposit presents a level of financial stability and discipline in the borrower’s savings and reduces the risk of default on the loan.
And with the cost of a 20% home loan deposit reaching hundreds of thousands of dollars – especially in Sydney and Melbourne – reducing that financial pressure on single parents could give them the opportunity to purchase a 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 aged 18 or over. There is an income limit of $ 125,000 per household.
The FHG is available from July 1, 2021 and can help potential buyers get approval for a home loan with as little as 2% down payment.
What are the advantages and disadvantages of the family home guarantee?
The FHG will be crucial in helping single parents get a foothold on the property ladder and secure a home for their family. But it’s important that single parents weigh the pros and cons of FHG before considering applying, as there are some risks to keep in mind.
Benefits of the family home guarantee
- Boost your eligibility for a home loan
The most important advantage of FHG is that it allows single parents to increase their chances of getting a home loan with a smaller deposit amount. Home loan lenders have strict regulations about who they can offer finance to, and having a large deposit is one of the most common things that keep everyday Aussies out of mortgage.
Not only is a lender more likely to approve a borrower who has a 20 percent down payment, they may be more likely to be offered a more competitive mortgage rate. The FHG sees the government acting as guarantor of their deposit up to 20 percent, thus increasing the chances of the single parent to approve the loan.
- Avoid Lender Mortgage Insurance (LMI)
Like the first home loan deposit system, the FHG allows borrowers to secure their smaller deposits up to 20 percent of the property’s value. This allows potential buyers to avoid paying LMI on their mortgage.
Borrowers are expected to pay this insurance to their lender when their deposit is less than 20 percent, and it can easily climb into the tens of thousands of dollars range depending on the value of the property.
While lenders can allow borrowers to add this cost to their mortgage, by increasing their loan amount, they will increase their outstanding repayments and the amount of interest paid over the life of the loan. The FHG sees the government guaranteeing the remaining portion of their deposit up to 20 percent, which allows the single parent applicant to avoid this pesky cost.
Risks of the family home guarantee
- Higher outstanding refunds
Generally speaking, the smaller a borrower’s deposit, the higher their outstanding repayments. The government vouches for part of the applicant’s home loan, but the borrower always approaches the loan with a deposit of just 2 percent. This means that due to the higher loan amount and interest charges, single parents will pay significantly more over the life of the loan than borrowers with only a 5 or 10 percent deposit.
RateCity tightened the numbers on mortgage payments on a $ 500,000 30-year property with a 2% deposit, compared to larger home loan deposits. Research found that borrowers with a 2 percent down payment paid significantly more in mortgage payments.
While this does not mean that the single parent applicant should avoid using the FHG, it should be borne in mind that the refunds will be higher than if they were saving for a larger deposit. However, during the time it takes for them to save for a larger deposit, the median house price may also have risen, often making it a dead end. Either way, it’s worth running the numbers on a reimbursement calculator to ensure applicants can afford ongoing reimbursements.
Refunds on a $ 500,000 property with different deposit sizes
|Deposit size||Amount of the loan||Monthly repayments||First year refunds||Total refunds|
|2%||$ 490,000||$ 2,037||$ 24,444||$ 733,285|
|5%||$ 475,000||$ 1,975||$ 23,700||$ 710,838|
|ten%||$ 450,000||$ 1,871||$ 22,452||$ 673,425|
|15%||$ 425,000||$ 1,767||$ 21,204||$ 636,013|
|20%||$ 400,000||$ 1,663||$ 19,956||$ 598,600|
Note: Based on a hypothetical mortgage loan scenario for a property of $ 500,000 and loan repayments over 30 years. Figures based on current owner-occupant principal average and 2.89% interest rate. The figures for total repayments are given as an example only and do not take into account fluctuations in interest rates over the life of the loan. Figures do not include fees. Data correct as of 21.05.2021
What other government assistance options are available?
The First Home Guarantee is not the only government program available to help potential buyers secure a home loan or reduce the costs of buying a property.
There are a range of government programs, grants and concessions available which may differ from state or territory to territory. This includes first-time home buyer programs and stamp duty reductions or exemptions.
For more information on the types of government assistance that may be available to you – especially if you’re a first-time home buyer – please read our full guide.