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 $40,000 in LMI fees with this scheme.

This $500 million scheme is slated to come into effect by January 2020 and will be given out on a first come first serve basis.

Who is eligible for the first home loan deposit scheme?

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

  • A minimum deposit of at least 5% is needed.
  • Single first-home buyers earning up to $125,000 p.a. or couples earning up to $200,000 p.a. are eligible.
  • The value of homes that can be purchased under the scheme will be determined on a regional basis, reflecting the different property markets.
  • The scheme will initially 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 full details and eligibility criteria are yet to be announced but we do know that the scheme is modelled after New Zealand’s own first home buyers scheme called the Welcome Home Loan which has been in effect since 2003.

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.

It can take nine to ten years for an average household to save that deposit.

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 basically act as the mortgage insurer for your home loan.

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.

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 looking to buy in Sydney where the median price is $830,000 as of April 2019 with a 5% deposit, can save anywhere between $32,000 and $36,000 approximately in LMI depending on the lender’s mortgage insurer.

However, if you were to put up a 10% deposit, the LMI range goes down significantly between $17,000-$18,600.

Similarly, in Melbourne, where the median price is $660,000 as of April 2019 with a 5% deposit, you’re saving anywhere between $28,000 and $31,700 approximately in LMI.

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

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.

The full details are yet to be announced. We’ll keep you updated.

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.

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