First Home Buyer 5% Deposit Scheme hits parliament

Emma Duffy By on September 13, 2019

Image by Samantha Garrote via Pexels

Consultations with lenders regarding their participation in the Federal Government’s new First Home Loan Deposit Scheme are due to begin following the introduction of draft laws.

Prior to the federal election this year, Prime Minister Scott Morrison surprised everyone by announcing the scheme if his government was re-elected.

Labor then pledged to match it, and this week Housing Minister Michael Sukkar on Thursday introduced draft laws to set up the scheme, acknowledging the struggles first home buyers face.

“The scheme will help first home buyers enter the property market sooner by providing a guarantee that will allow eligible first home buyers on low and middle incomes to purchase a home with a deposit of as little as 5%,” Mr Sukkar said yesterday in a joint statement with Treasurer Josh Frydenberg.

“The Scheme will support 10,000 first home buyers each financial year. The Government recognises that saving a deposit has become a more significant barrier to entering the housing market than the ability to service a home loan. It can take 10 years for the average first home buyer to save a 20% deposit. 

“The Morrison government’s plan to build a stronger economy will continue to help first home buyers own their first home sooner.”

The Housing Industry Association (HIA) has welcomed the introduction of the bill.

“The introduction of legislation by the Treasurer, the Hon. Josh Frydenberg, to support the homeownership aspirations for 10,000 first home buyers is a key milestone in delivering this important election commitment,” said HIA Managing Director Graham Wolfe.

“The First Home Loan Deposit Scheme will save an average first home buyer in Sydney, with less than 20 per cent deposit, tens of thousands of dollars over the life of their loan.”

Let’s take a look at what we know about the First Home Buyer Deposit Scheme so far.

What is the First Home Buyer Deposit Scheme?

The First Home Loan Deposit Scheme is based on a scheme already operating in New Zealand and will be available to eligible first home buyers who have saved a deposit of at least 5%.

The government would then guarantee the additional amount needed to reach the 20% deposit, which it says will allow borrowers to save up to $10,000 by not having to pay lenders mortgage insurance (LMI).

The $500 million scheme is due to begin on 1 January 2020 and will be capped to a maximum of 10,000 loans every year on a first-come, first saved basis.

Who is eligible for the First Home Buyer Deposit Scheme?

An income threshold will apply. Singles earning up to $125,000 and couples with a joint income of $200,000 will be eligible if it’s their first home loan and they are both first home buyers. Support will stay in place for the life of the loan. If the borrower refinances to a new loan or lender, the guarantee will end.

According to the Liberal Party, the scheme will be targeted to ‘entry properties’, with a maximum eligible loan size to be determined on a regional basis to reflect the different property markets.

First home buyers can use the scheme in conjunction with the First Home Super Saver Scheme and state or territory first home buyer grants and duty concessions.

The government will guarantee deposits through the National Housing Finance and Investment Corporation (NHFIC) which has started consulting with lenders about their participation in the scheme.

Scott Morrison said: “The National Housing Finance and Investment Corporation will partner with private lenders to deliver the First Home Loan Deposit Scheme, prioritising smaller lenders to boost competition”.

How risky is it to buy a home with a high loan-to-value ratio (LVR)?

While some have welcomed the scheme as a significant leg-up for first home buyers, there are concerns that borrowers may find themselves in a negative equity position.

Economists say the scheme could result in borrowers ending up with a loan that’s bigger than what their house is worth if the house price slump continues.

“It’s in effect encouraging people to take out 95% loan-to-value ratio (LVR) loans,” said former ANZ Bank chief economist, now a vice-chancellor research fellow at the University of Tasmania, Saul Eslake.

“In a market where prices have been falling, there’s a risk that someone who enters this scheme may find themselves in a negative equity position.”

Data from the Australian Prudential Regulatory Authority (APRA) shows a rise in the number of home loans being taken out with high LVRs.

According to the data, 80%+ LVR new loans now account for over 21% of new home loans approved.

Australian Property Institute CEO Amelia Hodge told borrowers should make sure they have ample emergency savings in case they can’t make home loan repayments.

Minimum repayments on home loans with high LVRs tend to be bigger because the amount of money being borrowed is larger.

Looking for a low variable rate home loan? The table below displays owner-occupier products which may represent the best of the big four banks, best of the top 10 customer-owned banks and the best of the larger non-banks. 

Provider Ad rate
Comp rate*
Purchase or Refi, P&I 80% Smart Home Loan 2.88% 2.90% $1,660 More details
Discount Variable 80% 3.07% 3.09% $1,702 More details
Base Variable Rate Special P&I 3.20% 3.20% $1,730 More details
Ad rate
Comp rate*
Purchase or Refi, P&I 80% Smart Home Loan
2.88% 2.90% $1,660
More details
Discount Variable 80%
3.07% 3.09% $1,702
More details
Base Variable Rate Special P&I
3.20% 3.20% $1,730
More details

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 1 November 2019. View disclaimer.

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The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in 2018. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

In the interests of full disclosure, and are part of the Firstmac Group. To read about how manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate includes both the interest rate and the fees and charges relating to a loan, combined into a single percentage figure. The interest rate per annum is based on a loan credit of $150,000 and a loan term of 25 years.

Home loan rates as low as 2.88%

Compare now
Emma Duffy
Emma Duffy joined as a Finance Journalist in 2019 after spending a year as the editor of The Real Estate Conversation. She's most passionate about improving the financial literacy of millennials by writing about complex financial topics in a way that's easy for the average Joe (or Jill) to understand.
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