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First Home Buyers Deposit Scheme

The first-home buyer deposit scheme is about to kick in, but how does it work and who is eligible?

First-home buyers are about to get a leg-up onto the property ladder, with the start of the federal government’s First Home Loan Deposit Scheme from January.

The scheme will allow 10,000 first-time buyers to purchase a property with a deposit of just 5 per cent, without having to pay costly lenders’ mortgage insurance.

The insurance is normally levied on borrowers with a deposit of less than 20 per cent of their loan amount. But the government will act as guarantor for 15 per cent of the loan amount.

In Melbourne, the scheme paves the way for first-home buyers to purchase a $600,000 home with a deposit of just $30,000.

Property purchases are capped at $600,000 in Melbourne and Geelong, while those who buy in other areas of the state can purchase a home for up to $375,000.

The deposit scheme, part of the National Housing Finance and Investment Corporation Bill (NHFIC) to tackle housing affordability, is designed to make it easier for first-home buyers to break into the market.

It is expected to cut the time it takes to save a deposit by at least half.

Avoiding the lenders’ mortgage insurance hit can also save first-home buyers tens of thousands of dollars.

The insurance on a $600,000 home purchase with a 5 per cent or $30,000 deposit is more than $25,000.

The scheme is eligible for single first-home buyers who earn up to $125,000 or couples earning up to $200,000 if they have saved 5 per cent of the value of the home.

The government guarantee would stay in place for the life of the loan or until it is refinanced.

It is limited to just 10,000 first-home buyers each financial year, on a first-come, first-served basis.

It is the latest boost for first-home buyers, who have seen affordability improve amid the property market downturn and state government stamp duty assistance, which provides exemptions for purchases up to $600,000 and concessions for purchases up to $750,000.

Latest Australian Bureau of Statistics data shows lending to first-home buyers increased 5.2 per cent in August, the strongest rise this year.

But critics have warned the scheme could lead to riskier borrowing and push up prices.

The Grattan Institute has branded the scheme “fatally flawed” and claimed increased house prices are an inevitable outcome.

It also claims the scheme is unlikely to make a material difference in its current form because it is limited to 10,000 buyers a year.

“The scheme is small so it is unlikely to make much of a difference to home ownership rates for young Australians or house prices,” the Grattan Institute report notes.

“But if the scheme were expanded it would prove counterproductive: It would push up prices, benefiting sellers at the expense of first-home buyers, while increasing the risks of inappropriate lending at costs to both households and government.”