5% Deposit Scheme or a family guarantor: which one fits your purchase

5% Deposit Scheme or a guarantor: which one should you use?

The 5% Deposit Scheme usually wins if the home is under your area's price cap and you qualify, because it removes LMI without putting anyone else's home behind your loan [1]. A family guarantor makes more sense when the price is over the cap, you've owned property in the last 10 years, or you want freedoms the scheme doesn't allow while it's in place, such as renting the home out or borrowing more [1].

If neither fits, paying LMI can still be the right answer, and for some jobs a lender will waive it (part 24).

That's the short answer. The rest of this guide is the reasoning, so you can test it against your own price, your own history and your own family.

What's the difference between the 5% Deposit Scheme and a family guarantee?

The difference between the 5% Deposit Scheme and a family guarantee is who stands behind the part of your loan above 80%. LMI is insurance a lender takes out when you borrow more than 80% of a home's value, and you pay for it.

Under the scheme, Housing Australia, a government agency, guarantees the lender in place of that insurance [1]. The government doesn't lend you money or give you money, and your family signs nothing. You apply through a lender on the scheme's panel, not to the government [2].

Under a family guarantee, a parent or another close relative uses the equity in their own home as extra security for your loan. Equity is the part of a home they own outright, its value less what they still owe. They don't hand over cash or make your repayments. They promise to pay a set amount if you can't, and a mortgage over their property secures that promise [5].

What this means for you: on both routes you borrow the same amount and owe the whole loan. What changes is who carries the risk the lender would otherwise insure, a government agency or your family.

Is the home you want under the scheme's price cap?

The 5% Deposit Scheme's price cap is the first test, because if the home is over it the scheme isn't available at all. The cap depends on the state and on whether you buy in the capital city and its listed regional centres or in the rest of the state. The ACT has one cap for all areas [1].

Both the price you pay and the lender's valuation have to be at or under the cap. For vacant land with a separate building contract, the land and the build count together [1].

The regional centres that share the capital-city cap are a short list: in New South Wales the Central Coast, Coffs Harbour–Grafton, the Illawarra, the Mid North Coast, Richmond–Tweed, and Newcastle and Lake Macquarie; in Victoria, Geelong; in Queensland, the Gold Coast and the Sunshine Coast [1]. A buyer in Ballarat, Bendigo, Townsville or Cairns is on the rest-of-state cap [1].

The full rules on caps, including the external territories, are on the First Home Guarantee.

What if the home is over the cap?

If the home is over the cap, the choice is made for you: the scheme is out, and the routes left are a family guarantee, a profession waiver if your job qualifies, or paying LMI [1].

An illustration, not a client file: a $750,000 house in Townsville is over the Queensland rest-of-state cap of $700,000 [1]. With a 5% deposit of $37,500, the loan is $712,500. A guarantor would need to back about $112,500 to bring the loan on your own home down to 80% of the price. Paying LMI instead would be about $32,000 on one insurer's first home buyer rate card [13][16].

What this means for you: check the cap for the exact suburb before you fall for a house. In Victoria and Queensland the gap between the two caps is $300,000, so the same price can sit inside the scheme on the coast and outside it an hour inland [1][16].

What does each route cost on the same home?

On the same home, the 5% Deposit Scheme and a family guarantee usually cost you the same: no LMI either way. The difference is what each asks of other people. Here's one purchase three ways, an illustration, not a client file: a $700,000 home in Brisbane, under the Queensland capital-city cap, with a $35,000 deposit (5%). Purchase costs such as stamp duty are left out to keep it simple.

The LMI figure is from one insurer's first home buyer rate card at 95%. It's indicative, not a quote, and premiums vary between insurers and lenders [13]. The guarantor figure is the amount needed to bring the loan on your own property down to 80% of the price [16].

How much LMI do both routes save, and how big is the guarantee?

Both routes can save the whole LMI premium on a 95% loan, and that grows with the price. The guarantee a parent would back grows with it, so the two numbers belong side by side.

These are illustrations: the LMI is from one insurer's first home buyer rate card, not a quote, and the guarantee is the gap between your 95% loan and 80% of the price. Each lender sets its own level [13][16]. Which rows fit under a scheme cap depends on where you buy: the $1,500,000 row fits only in Sydney and the NSW regional centres [1].

What this means for you: on the $700,000 home, either route is worth about $30,000 on the day you buy. The scheme gets you there with nobody else's home involved; the guarantee gets you there with your parent carrying a $105,000 promise. That's the trade, in two numbers.

What does each one ask of your family?

The 5% Deposit Scheme asks nothing of your family. They don't sign anything, and their home isn't involved [1].

A family guarantee asks a lot. MoneySmart, the government's money guide, puts it in one line: "Being a guarantor means you may have to repay someone else's loan." [5] If you stop paying and selling your home doesn't clear the debt, the lender can call on your guarantor for the guaranteed amount, with interest and costs, and enforce against their home if they can't pay [5].

It reaches into their own plans too. Lenders count the guarantee against them when they apply for credit, so refinancing, a new loan or an investment purchase can get harder while it stands, and a default on your loan can be recorded on their credit file [5].

What this means for you: this is the difference that matters most and the easiest to skip past. The person you'd ask should read it before you ask, and see what it means for the person who signs.

Is a guarantor liable for the whole loan?

A guarantor isn't liable for the whole loan if the guarantee is limited, which caps what they can owe at a stated amount plus interest and costs. An unlimited guarantee can cover the whole debt [6].

Banks that have signed the Banking Code of Practice must limit a guarantor's liability, and must take reasonable steps to meet the guarantor without the borrower there, in most cases [6]. Not every lender has signed, so the cap has to be read in the guarantee deed itself.

The lenders' own guides add detail. St.George limits its Family Pledge to a nominated amount [9], and ANZ describes its guarantee as limited [10]. NAB's guide says the cap doesn't move when the borrower later borrows more, unless the guarantor agrees in writing [8].

The scheme has nothing to compare here: there's no family deed, because there's no family guarantee.

What happens if you can't keep up the repayments?

If you can't keep up the repayments, you owe the whole loan on either route. The scheme and a guarantee both protect the lender, not you [1][5].

With the scheme, the government's guarantee is to the lender, in place of mortgage insurance, and your family isn't involved [1]. With a guarantor, the lender turns to your property first. Only if selling it leaves a shortfall can the lender ask your guarantor for up to the guaranteed amount, with interest and costs [5].

A guarantor has some options along the way. CommBank's guide says a guarantor can end the guarantee by paying out either the borrower's debt or their own maximum [7].

What this means for you: if the repayments themselves are the worry, neither route fixes that. Work out what you can afford first; see how much can I borrow.

Who can use each one?

The 5% Deposit Scheme has fixed eligibility tests set by the government; a family guarantee has the lender's own criteria, and those differ from lender to lender [1].

For a guarantee, the person who signs matters as much as you do. Lenders usually look for close family who own property with enough equity, and who could pay the guaranteed amount if they had to.

Can you use the scheme if you've owned property before?

You can use the 5% Deposit Scheme only if you haven't owned property in Australia in the last 10 years, and the test is wider than it sounds [1].

It counts any freehold interest, including land, a lease of 50 years or more, or a company title interest, whether the property was residential or commercial, an investment or a home, lived in or not, and held alone or with a former partner [1]. Inherited land counts. So does a share of a commercial unit bought during a past relationship. If you're buying with someone, both of you must pass [1].

A family guarantee has no government test like it. St.George, for one, offers its Family Pledge for every owner-occupier purchase [9].

What this means for you: if anything has been on a title in your name in the last 10 years, the scheme may be out before you start, and a guarantee may be the route that's left.

Which family members can be a guarantor?

Which family members can be a guarantor depends on the lender, and the lists aren't the same. CommBank names a parent or legal guardian, an adult child, a sibling or a grandparent [7]. Bankwest names a parent, adult child, sibling, grandparent, spouse or de facto partner, or a legally appointed guardian [12].

Westpac names parents, a legal guardian, siblings or an adult child, and not grandparents [11]. St.George names parents, siblings, sons and daughters [9]. ANZ names no one beyond "a family member" [10], and NAB names no relationships at all [8].

What this means for you: if a grandparent is the one offering, the lender list is much shorter. And if no one in the family can or should sign, the comparison is between the scheme and paying LMI, not the scheme and a guarantee.

What if you've saved close to 20%?

If you've saved close to 20%, the 5% Deposit Scheme may not be open to you at all. It has a ceiling as well as a floor: with 20% or more saved after purchase costs such as stamp duty and legal fees, your loan isn't eligible [1]. On a $700,000 home that's $140,000 [16].

The guide also says that moving cash or assets to someone else to get under the limit goes against the scheme's intent [1].

A guarantee works the other way: every dollar of deposit you add takes a dollar off what your guarantor backs. Saving another $20,000 on the $700,000 home cuts the guarantee from $105,000 to $85,000 [16].

What this means for you: near 20%, there's less LMI to avoid and less reason for either route. The LMI on a loan just over 80% is far smaller than on a 95% loan [13].

Which one is quicker to arrange?

The 5% Deposit Scheme has fewer steps to arrange than a family guarantee, because there's no second property to value and no second person's legal advice. The scheme has no waiting list and no limit on places [2].

The scheme still runs on a clock. The lender reserves your place and you have 14 days to complete the application, then 90 days from pre-approval to find a home and sign a contract [1].

A guarantee adds steps. The guarantor's property is usually valued, and they need their own legal advice: Westpac and St.George require it, and ANZ and CommBank recommend it [7][9][10][11]. ANZ also gives a guarantor a 3-day consideration period, which can be waived where they've taken independent legal advice [10].

What this means for you: if you're buying at auction or on a short settlement, the guarantee's extra steps need to be under way before you bid, not after.

Which lenders offer the scheme, and which take a guarantor?

The 5% Deposit Scheme is offered only through Participating Lenders, the lenders Housing Australia has authorised. There are more than 30, including ANZ, Commonwealth Bank, National Australia Bank and Westpac, and the full list is on the scheme's website [3].

Guarantor loans are each lender's own product, under its own name: Family Security Support at CommBank [7] and Family Pledge at St.George [9], for example. Money Brain read the guarantor material of six lenders, CommBank, Bankwest, Westpac, St.George, ANZ and NAB, and they differ on who can sign, what security they take and how the guarantee ends.

Being on a panel doesn't mean a lender will approve you. On either route the lender still assesses your income, your debts, your living costs and your credit history [1].

Does either one help you borrow more?

Neither the 5% Deposit Scheme nor a family guarantee raises what your income can support. Both help with the deposit, not the repayments.

The lender works out what you can borrow from your income, your debts and your living costs, and checks you could still repay if rates were at least 3 percentage points higher, the buffer APRA expects banks to use [14].

Where the routes differ is the deposit. The scheme needs at least 5% [1]. With a guarantee, some lenders lend up to the full price: ANZ's own page describes up to 100% with a guarantee [10]. Borrowing 100% also means owing 100%, and if values fall you can owe more than the home is worth.

What can and can't you do while each one is in place?

While the 5% Deposit Scheme's guarantee is in place, you live in the home, you can't rent it out and you can't increase the loan [1]. A family guarantee carries no government rules like these; the lender's own loan terms apply.

The scheme's refinancing rule catches people: you can move to another Participating Lender and keep the guarantee, as long as you don't increase the loan or extend the term, but move to a lender off the panel and the guarantee is lost [1].

A guarantee ties up your guarantor instead. If they want to sell, downsize or refinance while their home is still security for your loan, the lender holding it has to be part of that plan.

What if you want to rent it out or buy an investment later?

If you want to rent the home out later, the 5% Deposit Scheme doesn't allow it while the guarantee is in place. Housing Australia's guide works through a buyer who moves in with a new partner and wants to rent out the old place, and the answer is no [1].

A family guarantee has no rule like that from the government. Some lenders limit guarantees on investment purchases, though: St.George's Family Pledge covers every owner-occupier purchase, but an investment only for a first home buyer buying an investment property [9].

What this means for you: if there's a fair chance you'll move for work, partner up or want to keep this home as a rental within a few years, weigh that now. The scheme's rules last until the loan reaches 80% of the value (part 20).

Can you use the scheme and a guarantor together?

Using the 5% Deposit Scheme and a family guarantee on one loan isn't something to plan around. Neither the scheme's guide nor the guarantor material of the six lenders we read sets out how the two would sit together, so we don't say it can be done [1].

In practice they solve the same problem. Each covers the gap between your deposit and 80% of the price, so where the scheme fits, a guarantee usually has nothing left to do.

If you're weighing the two because your deposit is very small or the price is right at the cap, that's a question for a lender before you sign, not after.

When does paying LMI beat both?

Paying LMI beats both routes when the scheme doesn't fit and a guarantee isn't right for your family. It costs money, about $30,000 on the $700,000 example [13][16], but it asks nothing of your family and comes with none of the scheme's rules.

It can be the right answer when the price is over the cap, no one in the family can or should sign, or you want the freedom to rent the home out or borrow more later.

Some lenders also waive LMI for certain professions, usually up to 90% of the value and for some medical professionals 95%. Bank First, for one, waives it to 90% for healthcare and education workers buying their first home, on loans up to $800,000, but not for building [15]. See LMI waivers by profession and, for other small-deposit routes, no deposit home loans.

Where does Help to Buy fit?

Help to Buy is a third government route, for a different buyer. It's shared equity: the government contributes up to 30% of the price of an existing home, or 40% of a new one, from a 2% deposit, and you own the home while sharing some of its value with the government [4].

It has an income limit, $103,000 for a single buyer and $165,000 for joint buyers and single parents, 10,000 places a year, and every applicant must be an Australian citizen [4]. It can't be used together with the 5% Deposit Scheme [1].

See Help to Buy for its own rules.

Is the Family Home Guarantee the same as a family guarantee?

The Family Home Guarantee isn't the same as a family guarantee. A family guarantee is a private arrangement, where your family's equity backs your loan. The Family Home Guarantee was a government scheme for single parents, and it no longer runs as a separate scheme [1].

Single parents and legal guardians are now a group inside the 5% Deposit Scheme, buying from a 2% deposit and applying on their own [1]. No family member signs anything. See home loans for single parents.

What does a broker cost you?

How a broker is paid, and the rule Money Brain holds against it, is set out in full on its own page: what a mortgage broker costs.

Your first move

You've seen both routes on the same numbers. Now there's one question left: on the home you want, in the area you want, does the scheme fit, and if it doesn't, would a guarantee or paying LMI cost your family less?

That turns on your price, your history, your savings and who in the family could help, and it's what Money Brain works out before anything goes to a lender.