It’s a scheme created by the federal government in partnership with commercial lenders to help first home buyers get into the market with a lower deposit requirement and less costs. To help first home buyers with less than a 20% deposit the government can guarantee part of an eligible borrower’s loan. This means that the first home buyer needs a smaller deposit than typical and doesn’t incur the cost of lenders mortgage insurance which can be more than $25,000 in some cases.

To get the standard loan terms lenders typically require a borrower to have at least a 20% deposit. Lenders will lend to those with less deposit, 10% or 5% for example but this then requires the borrower to fund the cost of lenders mortgage insurance (LMI) which as mentioned can be many thousands of dollars. LMI protects the lenders in case of default NOT the borrower. The interest rates offered for loans where the deposit is less than 20% are also considerably higher than those with bigger deposits.

Using the Guarantee Scheme, a first home buyer can purchase their first home with a deposit of just 5% (plus costs*) 
and borrow the other 95% from one of the participating lenders in the scheme. The Government would in background guarantee a portion of the loan meaning the lender essentially carries the risk of a standard 80% loan. The first home buyer would avoid paying LMI altogether and should qualify for the lower interest rates offered on standard loans. 
A win win for the borrowers and lenders.

The Guarantee Scheme is not a cash payment. The borrower still must be able to afford the loan repayments on the full amount of the loan i.e., up to 95% of the property value. It is however a way around some of the restrictions that have made lower deposit loans hard to qualify for and expensive.

*NB – costs need to be covered by the purchasers. They can be made up of stamp duty, lenders application fees, conveyancing fees, inspection fees etc. Some state government also offer stamp duty concessions for first home buyers.