Are the first home buyer schemes all they are cracked up to be?

It has been reported that in the last 12 months for the financial year 2022 - 2023, nearly a third of all first home buyers took advantage of a government guarantee to help them in buying their first home.

According to the National Housing Finance and Investment Corporation (NHFIC), 32,500 home buyers used the guarantee last financial year, up from 23,300 the previous year. Of these, nearly one in three were first home buyers compared to one in seven in 2021-2022.

Further more, it was a significant increase in the younger first home buyers participating in the scheme which was recorded in the last financial year,. More than half of those successful in obtaining a place under either the First Home Buyer Guarantee or Regional First Home Buyer Guarantee were under the age of 30.

To put it into context, the Federal Government's First Home Buyer Guarantee (FHBG), allows eligible first home buyers to purchase a home with as little as a 5% deposit, while avoiding paying mortgage insurance. So for a first home buyer with a smaller deposit, by securing a place in the FHBG scheme it can enable them to avoid having to delay the purchase of their first home until they have the required 20% deposit. Instead, these first home buyers can bring their purchase forward and embark on their first home dream earlier by securing a place under the FHBG scheme.

With house prices sitting at the levels they are in many suburbs, this can be quite advantageous when confronted with the daunting prospect otherwise of having to save 20% deposit.

So with increasing numbers of first home buyers seeking the help of government guarantees, is it a 'no brainer' for any eligible first home buyer to seek support of such a scheme when buying their first home.

The answer could be yes and no, depending upon your circumstances. Without a doubt helping first home buyers break into the market earlier by removing the need to save a large deposit can be the factor upon which their chances of buying their first home hinges. First home ownership could become a reality and sooner.

However a point of caution. Whenever a first home buyer has a smaller deposit, it means that while avoiding having any mortgage insurance added to your loan, you are left with a larger loan to repay than if you had a bigger deposit. A larger end loan means higher repayments than if you had a bigger deposit. Therefore, before pursuing a place in a scheme you need to make sure that the loan that you will end up paying each month is affordable for you.

Secondly, it is important to be aware of what is required of you by being a part of any first home government scheme. Unlike the federal government First Home Buyer Guarantee scheme (FHBG) we are discussing here, the Victorian Government Home Buyer Fund (which similarly allows first home buyers to enter the market with a small deposit), is a 'shared equity scheme' whereby the government takes a percentage interest ownership in your property, equivalent to what they are putting up for you to purchase. So if you have a 5% deposit and the Victorian Government Home Buyer Fund is providing the remaining 15%, then 15% of your property. is owned by the Victorian Government fund.

Under the Victorian Home Buyer Fund, the percentage that the fund has provided to you in buying your home must be repaid at some stage in the future. This percentage is not a fixed dollar amount so any future property growth will be shared by the Victorian Government Home Buyer Fund equivalent to their ownership in your property. If it is 15% shared ownership, the fund is entitled to 15% of any future value of your property.

In comparison, the Federal Government's FHBG scheme does not take any ownership in your property nor does it share in any of the future gains in your property.

In some instances, a first home buyer's circumstances may make them more suitable for one scheme more than another. In other circumstances, it may not be appropriate to be under either scheme. It is always therefore important to discuss the ins and outs of all available schemes and how they best suit you, before you take the leap.