Shared equity schemes vs guarantor loans

Taking out a mortgage can be a daunting task. There’s a bunch of financial hurdles to navigate, such as procuring the necessary funds for a deposit and securing a home loan.

Affordability is a huge factor plaguing first home buyers, singles and low income earners that wish to buy property in Australia’s popular metropolitan areas. The Australian Bureau of Statistics (ABS) reports that the median house price in Brisbane rose almost 30% year-on-year in the March quarter 2022 to $787,500. In Melbourne the median house price increased almost 10% over the same period to $930,000. Homes in Canberra were up 28% to $1.06 million, while prospective buyers in Sydney face a median price of $1.24 million, up 16% quarter-on-quarter.

Beyond applying for a substantial loan to cover the principal amount, you’ll need to ante up a 20% deposit and enough cash to cover stamp duty, Lender’s Mortgage Insurance (LMI) and any legal fees.

Sharing the burden of these costs can expedite the process and there are a few different options to consider.

Shared equity schemes

Although relatively uncommon in Australia, shared equity schemes offer homebuyers a way into the market with the addition of a third party investor. This equity partner contributes to the costs of purchasing a home in exchange for a share in the property and its future value.

The conditions of a shared equity agreement will differ depending upon the equity partner. Potential partners include state governments, non-profit organisations, for-profit lenders, and private individuals. Some schemes will be more favourable than others so it’s important to research a range of options to decide which suits your situation and eligibility criteria.

Generally, as a homebuyer you’ll consult your chosen equity partner to establish the percentage share they’ll contribute and then find a suitable property to purchase. You’ll need to apply for a home loan to cover your portion of the mortgage. Some equity schemes designate specific lenders while other arrangements are more flexible. These agreements are mostly only offered to owner-occupiers, which means that you’ll be required to live in the property you purchase.

It’s often possible to break a shared equity agreement but there are usually stipulations. Some schemes allow you to pay out your equity partner prior to selling your home or gradually reduce your partner’s share in your property over time. Beware extra charges and contract provisions.

Examples of shared equity schemes

BuyAssist - National

BuyAssist is a subsidiary of the National Affordable Housing Consortium (NAHC). The program provides support for eligible Australians to purchase a newly built, approved property.

The amount of support available to individuals, couples or families will typically be around 25% of the purchase price of the property. This is combined with any savings you might have and a home loan from a lender that supports the program.

What’s unique about this program is that participants don’t need to provide a deposit.

You’ll enter into a Home Ownership Participation Agreement (HOPA) to access the funds. The HOPA outlines the rules that govern how the support is provided and a list of obligations.

As with most shared equity agreements the investor, in this case BuyAssist, will receive a proportionate share of the property’s value when the HOPA is completed. This usually occurs when you decide to sell the property or refinance it.

On settlement there is a one-off program participation fee of $1,100 and an annual administration and compliance fee of $137.50 that is payable monthly. This fee is ongoing until you exit the HOPA and is indexed to the published CPI annually.

Shared Equity Scheme - NSW

Commencing January 2023, the NSW Government will trial a shared equity scheme for single parents of a child or children under 18 years of age; singles aged 50+ years; and first homebuyers who are nurses, teachers or police.

The property price needs to be less than $950,000 if buying in Sydney and major regional centres (e.g. Newcastle, Central Coast, Illawarra) or below $600,000 in other regional areas of the state.

The government will contribute equity of up to 40% of the purchase price of a new dwelling and up to 30% of the purchase price of an existing home. As the value of the property changes over time the state will share in any gains in value, proportionate to their contribution. You can make voluntary payments over time to advance to full ownership of the property.

You’ll need a minimum deposit of 2% of the purchase price and won’t have to buy LMI.

There are a number of other conditions and costs associated with this scheme, including loan repayments, stamp duty, limited income thresholds, maintenance obligations and annual reviews. To find out more about the upcoming trial scheme visit the NSW Government website.

Victorian Homebuyer Fund - Victoria

As of October last year, eligible homebuyers in Victoria can receive a contribution of up to 25% towards the purchase price of their property, reducing their minimum required deposit to 5% and avoiding the need to pay LMI.

Participants can repay the government’s share, or interest in their property over time. These repayments can be made by refinancing, using savings, and from proceeds when the property is sold.

As with NSW’s scheme there are a raft of qualifications and conditions to be met for eligibility, including having an approved loan from a participating lender and sufficient funds to pay all acquisition costs associated with the purchase. To find out more consult the State Revenue Office.

HomeStart Finance - South Australia

The state government of South Australia offers a shared equity option of between 5% and 25% of the purchase price or property valuation, whichever is lower, up to a maximum of $200,000.

Their contribution cannot exceed the primary loan amount you apply for and isn’t available for land-only purchases. HomeStart will proportionately share in any property value gains when you sell your home.

You can make voluntary repayments of $10,000 or more towards HomeStart’s share, on top of the minimum repayments to your primary loan, at any time.

To discover all the terms and conditions associated with this program visit HomeStart Finance.

Pathways shared equity loan - Queensland

If you’re a tenant in government-owned housing but can’t afford to buy the home you’re renting, the Queensland state government offers an option to partner up and buy.

The home must be the one you’re currently renting and available for purchase.

The loan repayments won’t exceed 35% of your income and you won’t pay rent on the department’s share of the home. However, you’re responsible for paying council rates, maintenance costs and home insurance.

Over time, you can buy more shares in the partnership and become a full home owner.

Learn more about this equity agreement by visiting the Queensland government website.

Shared Home Ownership - Western Australia

This scheme allows Western Australians to share in the purchase of a home with the Department of Communities through Keystart, the state government's home loan lender.

Eligible participants can purchase newly-built homes and off-the-plan properties offered by the Department across metropolitan and regional areas.

You can see a list of available properties on the Opening Doors website.

First homebuyers need just $2,000 or 2% of the purchase price (whichever is greater) as a deposit. There’s no savings history required, no LMI to pay and zero monthly account fees.

See Western Australia’s Department of Communities Housing website for further details.

More state government schemes

The Australian Capital Territory, Tasmania and the Northern Territory have similar shared equity schemes in place to provide homebuyers a more attainable entry point into the market.

Guarantor loans

Taking out a guarantor home loan is one way to secure a property mortgage by allowing a family member to use the equity in their own home as additional security for your borrowings.

A guarantor may assist you in meeting your deposit requirements and negate the need for LMI. The guarantor becomes responsible for keeping up loan repayments if you’re unable to do so.

The amount that can be guaranteed is a financial decision that’s made between the loan recipient and the guarantor - this can range from enough to cover your deposit to a larger portion of debt. Typically it’s the amount necessary to reduce your loan-to-value ratio (LVR) to 80%.

Guarantors will need to provide proof of equity, such as the title or deed to their property. They may also have to undergo a credit check and submit bank statements to verify their eligibility.

The primary difference between a shared equity scheme and a guarantor loan is that, in the case of the latter, a homebuyer retains all of the equity in the property. Given the risks involved in guaranteeing loans most lenders prefer that you appoint a parent or other relative as guarantor. Occasionally, lenders may allow you to select a close friend.

Most lenders will only allow a guarantor for owner-occupied purchases. This means investment properties are out.

Here’s an example of a guarantor loan:

You wish to buy a property that costs $800,000. You’ve been assessed by your chosen lender and have enough income to service a loan for this amount. You’ve saved $40,000 for a deposit. That’s equal to 5% of the purchase price. However, you need a 20% deposit (minus transaction costs) to avoid paying LMI. This means a further $120,000 for your down payment.

Let’s say your parent/s owns a home worth $1,000,000. They agree to provide you with the additional $120,000 needed for your deposit. This means you’ll have enough to secure the loan and avoid paying LMI.

In a worst case scenario, the issuing bank or institution can take possession of the guarantor’s property in order to sell it to service the loan if both parties cannot make repayments.

It’s important to understand the obligations and responsibilities that come with being a guarantor and being indebted to one. There are various terms and conditions you’ll need to agree to before signing so it’s worthwhile seeking legal advice before making any commitments.

The Australian Banking Association’s Banking Code of Practice is a set of enforceable standards that includes a three day acceptance window for guarantors - offering an opportunity to seek legal counsel, review the loan application and potentially back out of the agreement.

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