What Is the First Home Loan Deposit Scheme?

The First Home Loan Deposit Scheme allows first home buyers with deposits as low as 5% to get a home loan without paying Lenders Mortgage Insurance (LMI) fees.

Based on average purchase prices in the capital cities, first home buyers can save anywhere between $10,000 and $30,000 in LMI fees with this scheme.

When does the First Home Loan Deposit Scheme start?

The First Home Loan Deposit Scheme will start from 1 January 2020.

This $500 million scheme will be given out on a first-come, first-serve basis.

Applications for the scheme are not yet open.

Who is eligible?

There are several eligibility criteria first home buyers must meet to qualify for the first home loan deposit scheme:

  • A minimum deposit of at least 5% is needed.
  • Only Australian citizens who are at least 18 years of age are eligible. Permanent residents are not eligible.
  • Single first-home buyers earning up to $125,000 p.a. or couples earning up to $200,000 p.a. are eligible. Income from the financial year preceding the year in which the loan is entered into will be assessed.
  • Couples are only eligible for the scheme if they are married or in a de-facto relationship. Other persons buying together, such as siblings, parent/child or friends, are not eligible.
  • Loans under this scheme require scheduled repayments of the principal of the loan for the full period of the agreement. Interest-only repayments for a specific period are accepted only for loans relating to both the purchase of vacant land to the construction of a house on the land.
  • Applicants must be first home buyers who’ve not previously owned or had an interest in a residential property either separately or jointly with someone else. This includes residential strata, company title properties, regardless of whether it was an investment or owner-occupied property and whether it was ever lived in.
  • Applicants must intend to move into and live in the property as their principal place of residence (i.e. they must be owner-occupiers).

The value of homes that can be purchased under the scheme has been set (price caps) on a regional basis reflecting the different property markets.

Initially, the scheme will only be available to 10,000 borrowers a year which is only around 10% of the total number of Australian who purchased their first home in 2018.

The National Housing Finance and Investment Corporation (NHFIC) Investment Mandate Amendment (First Home Loan Deposit Scheme) Direction 2019, set out the core elements of the Scheme, including the property price caps.

What types of properties can be bought under the scheme?

Under the scheme, eligible first home buyers can buy the following types of properties:

Here’s the First Home Loan Deposit Scheme Factsheet outlining key points.

How does the scheme work?

Finding the deposit for your first home can be a real struggle, with most lenders currently requiring a minimum 20% deposit to avoid LMI.

Generally, it can take nine to ten years for an average household to save that deposit.

However, with this scheme, if you’ve saved up at least 5% of the property value, the government will essentially guarantee up to 15% so you can avoid the cost of LMI and enter the property market sooner.

So, instead of having to insure your home loan with a lenders mortgage insurer and paying a hefty fee, the government will guarantee any shortfall in your deposit and act as the mortgage insurer for your home loan.

Essentially, the government will guarantee the deposits through the National Housing Finance and Investment Corporation (NHFIC) who have already started consulting with industry leaders and will contract a panel of lenders to implement the scheme.

Currently, there’s no set number of deposit guarantees per state; the government will monitor and shape the guarantee further.

The guarantee will be available on a first-in-best-dressed basis.

How much am I saving in LMI with this scheme?

Your actual savings in LMI will be based on your deposit, the loan to value ratio (LVR) and your home loan amount.

Think of it this way; the lower your deposit is, the higher the risk is to the bank leading to higher LMI premiums.

For example, a first home buyer taking advantage of the First Home Loan Deposit Scheme in NSW, Sydney with a 5% deposit and purchasing a $700,000 property can save anywhere between $27,265 and $30,657 in LMI fees depending on the lender’s mortgage insurer.

However, if you were to put up a 10% deposit, the LMI range goes down significantly between $14,301 and $15,687.

Similarly, a first home buyer availing the First Home Loan Deposit Scheme in Victoria, Melbourne purchasing a $600,000 with a 5% deposit can save anywhere between $19,073 and $28,591 in LMI fees.

You can use our LMI calculator to work out exactly how much you’re saving.

The guarantee is not a cash payment.

What are the price caps for the first home buyer deposit scheme?

The value of the residential property must not exceed the price cap for the area in which the property is located.

The price caps will vary between states and whether you’re looking to buy in a city, large regional centre or regional areas.

New South Wales (NSW)

  • City or large regional centre: $700,000
  • Rest of state: $450,000

Victoria (VIC)

  • Capital city or large regional centre: $600,000
  • Rest of state: $400,000

Queensland (QLD)

  • Capital city or large regional centre: $475,000
  • Rest of state: $400,000

Western Australia (WA)

  • Capital city or large regional centre: $400,000
  • Rest of state: $300,000

South Australia (SA)

  • Capital city or large regional centre: $400,000
  • Rest of state: $250,000

Tasmania (TAS)

  • Capital city or large regional centre: $400,000
  • Rest of state: $300,000

Australian Capital Territory (ACT)

  • $500,000
  • Rest of state: Same price cap throughout the ACT

Northern Territory

  • $375,000
  • Rest of state: Same price cap throughout the NT

Other areas:

  • Jervis Bay Territory and Norfolk Island: $450,000
  • Christmas Island and Cocos (Keeling) Islands: $300,000

What are areas considered large regional centres?

The capital city price caps will apply to large regional centres with a population over 250,000, namely:

  • The Gold Coast;
  • Newcastle and Lake Macquarie;
  • The Sunshine Coast;
  • Illawarra (Wollongong);
  • and Geelong, recognising that dwellings in large regional centres tend to be significantly more expensive than other regional areas.

As per the Australian Bureau of Statistics.

How to apply for the First Home Loan Deposit Scheme?

To implement the scheme, the National Housing Finance and Investment Corporation (NHFIC) will contract a panel of lenders instead of dealing directly with borrowers.

As such, lenders or mortgage brokers will assess scheme eligibility alongside other standard home loan considerations such as serviceability, credit checks etc.

NHFIC will not be accepting direct applications.

Please note that applications for the scheme are not yet open and there are no waitlist for first home buyers wanting to apply.

The full panel of lenders contracted under the FHLDS scheme

Commonwealth Bank (CBA) joins National Australia Bank (NAB) as the second major participating bank in the government scheme along with 25 other smaller lenders.

Interestingly, Westpac was going to be the second lender as part of the panel of lenders contracted by the NHFIC. However, in light of the recent money laundering allegations, they’ve been axed from the scheme.

Besides, to ensure that smaller lenders play a significant role in the scheme, the government has revealed that the two major banks (including their subsidiaries) will not be permitted to facilitate more than 5,000 loan guarantees each financial year.

Moreover, not more than 2 major banks will be approved as eligible lenders for a financial year.

Along with CBA and NAB, the other 25 smaller lenders participating in the First Home Loan Deposit Scheme are:

  • Australian Military Bank
  • Auswide Bank
  • Bank Australia
  • Bank First (formerly known as Victoria Teachers Mutual Bank)
  • Bank of us (Tasmanian customer owned bank)
  • Bendigo Bank
  • Beyond Bank Australia
  • Community First Credit Union
  • Credit Union Australia (CUA)
  • Defence Bank
  • Gateway Bank
  • G&C Mutual Bank
  • Indigenous Business Australia
  • Mortgageport
  • MyState Bank
  • People’s Choice Credit Union
  • Police Bank (including the Border Bank and Bank of Heritage Isle)
  • P&N Bank
  • Queensland Country Credit Union
  • Regional Australia Bank
  • Sydney Mutual Bank and Endeavour Mutual Bank (divisions of Australian Mutual Bank Ltd)
  • Teachers Mutual Bank Limited (including Firefighters Mutual Bank, Health Professionals Bank, Teachers Mutual Bank and UniBank)
  • The Mutual Bank
  • WAW Credit Union

Additional lenders may be periodically added to the panel.

Peculiarly, the two major banks will start accepting applications under the scheme from 1 January while, the smaller lenders will only do so from 1 Febuary 2020.

What are the criteria for selection of lenders who can offer the guarantee?

The government has set the eligibility criteria for the selection of lenders who can offer the guarantee. Lenders will be selected based on:

  • their standard of customer care, including their treatment of borrowers in financial hardship;
  • the competitiveness of loan products offered by them for the FHLDS, including interest rates and other fees;
  • their quality of the loan origination processes and the associated level of financial risk to the Commonwealth;
  • their reputation;
  • the extent to which the decision to approve a lender will promote competition in lending markets and related markets; and
  • the extent to which all the lenders approved for the financial year when considered together can undertake credit activities (including through other entities providing credit services) across Australia.

Should you wait for the scheme to come into effect?

If you are likely to qualify for the scheme and are going to apply immediately when it becomes available, i.e. January 2020, then we recommend that you wait.

We are expecting that due to the high demand for a limited number of places, 90% of first home buyers will miss out on the scheme.

The government is yet to publish the full qualifying criteria for the scheme so you may find out that you are not eligible at a later date.

Moreover, some property markets, such as Sydney and Melbourne, have shown signs of high growth in the last few months.

In conclusion, if you are in a high growth market, it may be cheaper to pay LMI and buy now rather than to wait and risk paying a higher price for your home.

You can use our Buy Now Or Save More Calculator to figure out which option better suits your needs.

Is the scheme available for both new and established homes?

Yes, as per the latest NHFIC Exposure draft, the first home loan deposit scheme will be available for both new and established owner-occupied residential properties.

Can the scheme be used with other government grants?

Yes, the 5% first home buyer deposit scheme can be used in conjunction with the first home owners grant (FHOG) and duty concessions as well as the First Home Super Saver Scheme (FHSSS).

How long will the government guarantee last?

Once the borrower is approved for the scheme, the government guarantee lasts until the borrower refinances or the outstanding home loan balance falls below 80 per cent of the property purchase price — whichever comes first.

Ideally, you should only refinance when you have less than 80% owing on your home loan to avoid paying LMI fees.

What are the pros and cons of the first home loan deposit scheme?

What are the pros?

  • The government guarantee saves first home buyers with low deposits tens of thousands in LMI.
  • First home buyers can buy their first home sooner and enter the property market due to the required deposit of only 5%.
  • Your mortgage repayments will go towards paying off your home loan instead of on rent.
  • Along with other first home benefits such as the first home owners grant (FHOG) and the stamp duty exemption/concessions, the deposit scheme may incentivise first home buyers at the fringes to finally buy their own home.

What are the cons?

  • Buyers with low deposits will pay extra in interest over the life of the loan term than buyers with a 20% house deposit.
  • The scheme is limited to only 10,000 borrowers a year or roughly 10% of first home buyers from 2018.
  • There is a risk of borrowers ending up in negative equity, which is where the outstanding balance on a mortgage is greater than the property value. That’s because the scheme is essentially encouraging people to borrow at a high Loan to Value Ratio (LVR) because the government guarantee allows you to avoid the cost of LMI.
  • Some economists have also argued that this new incentive will further drive up demand for real estate, which will lock out first home buyers who don’t qualify for the scheme.

90% of first home buyers will miss out on the scheme

The most significant criticism of the federal government’s first home loan deposit scheme is the cap on the number of first home buyers (FHB).

The cap set at 10,000 FHBs per year is less than 10% of FHBs who purchased in 2018. So inevitably, 90% of FHBs will miss out on the scheme.

While 10,000 FHBs will appreciate the government scheme, it will do next to nothing to help the other 90,000 prospective FHBs.

Instead of band-aid solutions, industry experts want to see the government lead by example and put some of their large offices and employment nodes in regional areas; as well as remove stamp duty, improve infrastructure, and make other structural changes.

What other options are available if you miss out on the scheme?