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The federal government’s First Home Buyer Guarantee Scheme is being seen as the preferred support option for would-be new entrants to the property market, with brokers only pursuing family security guarantee loans if these buyers fail to meet government eligibility requirements.
The FHBG scheme was introduced to help first home buyers purchase a home sooner. Under the scheme up to 15% of the loan can be guaranteed, allowing buyers with as little as 5% deposit to avoid having to fork out for expensive Lenders Mortgage Insurance.
Mortgage broker John Contarino (pictured above) of Mobile Finance Broker, who is based in Far North Queensland and was the Australian Mortgage Awards Regional Broker of the Year in 2021, said the scheme had become the default option for first home buyers without a 20% deposit, rather than borrowers asking their parents to stump up the security for a family security guarantee.
“We used to see family guarantee scenarios more regularly, but since the government First Home Buyer Guarantee Scheme came in, we tend to see that more than family guarantees. Our preference now is that we use the government scheme as a first choice,” Contarino said.
The Banking Code Compliance Committee recently warned guarantors they should be fully informed about guarantor arrangements, with tough market conditions potentially increasing demand.
“Ensuring you are clear about what you are signing up for, in agreeing to guarantee a loan, is essential because of the large financial risks involved,” BCCC chief executive Prue Monument said.
“It’s also important that people don’t feel pressured into going guarantor. In the worst cases, this can amount to financial exploitation, or what’s known as elder financial abuse.”
Some recent research has suggested that, in some parts of Australia, borrowers who do choose to tap the “bank of mum and dad are at greater risk of losing their homes within five years.
A BCCC enquiry into the loan guarantee practices of banks in 2021 raised concerns about failures by banks to consistently provide full disclosure of key information to guarantors.
Contarino said some lenders require parents to be earning an income to process family guarantees. He said they need to be signed off by a solicitor to ensure guarantors understand the risks.
“There is that extra cost there. The solicitors have cottoned on to that as well, so it’s not cheap – about $750 for a standard form. So it’s more expensive, and our preference would be to direct borrowers to look at the government scheme if they are eligible,” Contarino said.
Family security guarantees are still being used for some clients. “We still do them. We had one recently, where the borrower didn’t qualify for the government scheme because he didn’t have proven savings, so we had no choice but to go with a family guarantee.”
There is extra work for brokers in processing a family security guarantee loan, as it involves interviewing the guarantors separately to ensure they are not under duress, as well as the collection of a second set of customer particulars from the guarantors.
“It’s about 50% more work,” Contarino said. “But we just absolutely get a kick out of getting first home buyers into their first house. There is no real extra risk there, just a little bit of extra work.”
Contarino said he has also never had any guarantor loans that have later become a problem loans.
Today’s family security guarantee loans are more palatable than in previous generations, when Contarino said parents faced the “horrendous” prospect of guaranteeing the full loan, rather than just the small portion of it required to avoid LMI.
“Initially there is resistance to family guarantees because they don’t understand how it works, because the banks used to take a full guarantee. Now, it’s just the shortfall in the 20% that they guarantee. Nine out of 10 find that attractive because their exposure is limited.”
A dramatic increase in property prices in regional areas over the last two years has also allowed Contarino to approach lenders and have some guarantors removed. “If the property increases in value enough, we can get the banks to release the guarantee. We’ve seen several of those.”
The FHBG is administered by the National Housing Finance and Investment Corporation (NHFIC) for the Australian government. It sits alongside two other similar schemes designed specifically for regional first home buyers and single parents with families.
Although there are only 35,000 FHBG places every financial year, the government rolled over 1,100 unused places from the 2021-22 financial year, meaning the NHFIC is currently working with a total quota of over 36,000 places this financial year, which ends for new applicants on 30 June 2023.
