Should I hop on the First Home Loan Deposit Scheme?

author-avatar By on November 04, 2020
Should I hop on the First Home Loan Deposit Scheme?

Photo by Nicolas Gonzalez on Unsplash

The Government’s First Home Loan Deposit Scheme is immensely popular with first home buyers, but should you sign up to the program?

It’s well documented the benefits and pitfalls of a 5% home deposit, with the cost of lenders mortgage insurance (LMI) one of the biggest pain points.

Where the First Home Loan Deposit Scheme (now referred to as the FHLDS or ‘The Scheme’) shines is that you can secure a home loan with only a 5% deposit and not have to pay LMI. Expectedly, it’s been popular, with first round spots gobbled up by first home buyers in just four months, with the Scheme estimated to support one in eight of all first home buyers.

However, just because you can sign up to the FHLDS, does that mean you should?

Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.

Should I sign up to the FHLDS?

Buying a first home is a dream for many. It means no more putting up with renting, and it feels like you’re getting somewhere in life, while having a place to call your own. The FHLDS has merit, as the Government essentially acts as a guarantor on up to 15% of the property’s value, removing the need for LMI, which can add up to a hefty saving. However, you should consider also the pitfalls of the Scheme, not least of which is buying a home with a mere 5% deposit. Below are some considerations to make.

The hassle of LMI eliminated

LMI typically costs around 3-4% of the purchase price, which if looked at in an alternate reality, could have been used for the house deposit. The benefit of the FHLDS is that it eliminates that cost, enabling first home buyers to purchase a property with a ‘true’ 5% deposit.

This is potentially a huge benefit, according to Samuel Philipos, managing director at Benevolence Financial Group (BFG).

“[A] 5% deposit provides the opportunity for first home buyers to be able to purchase a property sooner with a reduction in costs to acquire the mortgage,” Mr Philipos said.

“Generally banks will lend up to 95% including lenders mortgage insurance (LMI). LMI is usually 3-4% of the purchase price approximately so in reality, the bank will lend max up to 91%-92% without LMI (remainder going to cover LMI).

“This means that borrowers in reality without an LMI waiver need an 8-9% deposit, plus pay thousands in LMI, which adds up to mortgage costs over the long term.”

With no need for LMI, as the Government acts as guarantor on up to 15% of the property value, the FHLDS could save a lot of hassle, but that’s not the whole story, as you’ll see below.

FHLDS restrictions

Caleb Gray, a buyers agent at Lid Property Group, outlined two tips for first home buyers to stay ahead on the FHLDS.

  • “Purchasing in a good area - Many house and land packages are in greenfield estate which lack scarcity and fundamental drivers for property growth. These properties are most at risk for declining in value rather than appreciating. Smart first home buyers purchase existing homes in established suburbs that contain future growth drivers.”

  • “Having a buffer - Even if your property does decline in value, these loses are not realised if you have a solid buffer of savings and are able to maintain mortgage repayments. This can also be used for a rainy day if you were made redundant. It is typically recommended that home buyers should have 3-12 months worth of expenses in savings.”

However, there are two main problems with these tried-and-true methods if you’re buying a property using the FHLDS. The FHLDS has restrictions that essentially eliminate the usefulness of both these scenarios: the latest round of the FHLDS is for new builds only, and the Government wants you to use ALL your savings on the house deposit.

Saving 3-12 months' worth of expenses could mean you are ineligible for the Scheme. The Government’s website states: “The 5% must be made up of genuine savings. If you have 20% or more saved, then your home loan would not be covered by the scheme.”

In the capital cities, new builds that would fall under the property price thresholds (more on that later) would typically be in greenfield estates, far out of the city centre, as opposed to established suburbs closer to the CBD. While the new build stipulation means you could also use it in conjunction with HomeBuilder, unless you’re willing to find a rare gem or dilapidated property close to the city to knock down, you’re likely going to have to look further out.

While it’s always handy and prudent to have an emergency fund built up, the FHLDS essentially wants you to pour this into your home deposit (if it’s under the 20% deposit cap) rather than save it for a rainy day. Additionally, some state and federal home building grants you access could also mean you’re ineligible for the FHLDS. Also, keep in mind that shares and other investments are typically considered genuine savings - so if you’re sitting on a deposit of over 20%, don’t think you can tie a lot of it up in stocks to qualify. Those hoping to game the system by securing the loan with a 5% deposit before suddenly “discovering” 15% to pour into the loan’s offset account are out of luck.

As the NHFIC (the scheme’s administrator) says in its guide to the Scheme: “…it is important that you do not try and disadvantage other Australians by seeking to change your circumstances just to take advantage of the Scheme. This includes where you have a 20% or greater deposit and legally transfer your cash and other assets in order only to access the Scheme…”

Don't be like that guy from Toy Story...


Source: Reddit

Higher mortgage costs and lender restrictions

Although borrowers can secure a home loan with a 5% deposit without paying LMI under the FHLDS, they’re still paying interest on 95% of the home’s value, as opposed to 80%.

Lower-deposit home loans also tend to attract a higher interest rate as the lender assumes more risk.

  • For example, CommBank currently offers its 'Extra Home Loan' with a variable 2.69% p.a. (2.70% p.a. comparison rate*) for borrowers with a maximum LVR of 80% i.e. a 20% deposit.

  • The same home loan for borrowers with an LVR of more than 80% has an interest rate of 3.13% p.a. (3.14% p.a. comparison rate*). 

Figures were correct as of November 2020.

However, Aussie Home Loans' chief customer officer David Smith says the scheme’s lenders promise they won’t charge FHLDS borrowers higher rates than similar borrowers not using the scheme.

“While participating lenders may apply their own additional criteria for loans offered under the Scheme, such as restrictions on certain properties or suburbs, all participating lenders have committed not to charge eligible first home buyers higher interest rates than equivalent borrowers outside of the Scheme,” he said.

Nevertheless, a borrower with a 20% deposit is hardly equivalent to a borrower with a 5% deposit.

If you wanted to buy a $600,000 home, and borrowed $480,000 (80%), the total cost of the loan principal and interest rate of 2.69% would be $699,961, for a monthly repayment of $1,944.

Compare that with a 5% deposit on the higher interest rate (borrowing $570,000), and you'd pay $879,585 in total, for a monthly repayment of $2,443.

This also doesn't take into account any interest rate changes over time, as well as any monthly account keeping fees, account establishment fees and so on.

Using the ‘30% guide' to determine mortgage stress, a 5% deposit would mean you would ideally earn over $98,000 gross, as opposed to the 20% deposit where you'd ideally earn over $78,000. So to ‘afford’ the lower deposit means you’d ideally need to earn more - go figure.

Getting it right

Founder of the Australian Housing Initiative Ian Ugarte highlighted a couple of issues with the FHLDS.

“The first issue is that with so much stimulus going towards new housing, there’s an increasing likelihood that first home purchasers will be young people who are going to be purchasing in ‘greenfield’ sites, new development sites with an abundance of land, which aren’t likely to realise much capital growth, if any,” he said.

“Not only that, these first home buyers will be paying interest on a 95% loan, rather than typically saving for a deposit of 20% and taking out a loan for the remaining 80%, which might be manageable for first home buyers while interest rates remain as low as they are now.

“However, all it would take is a slight increase in interest rates and those same people might begin to struggle to afford to repay their loans and hold onto their homes.

“On the upside, I agree that everyone deserves an opportunity to purchase a home, and this is a way to help first home buyers get a foot in the property market.”

Founder of Reventon Finance, Billie Christofi, echoed these sentiments.

“I believe borrowers should take advantage of the current grants and interest rates and get into the market while these opportunities are available. It’s very important that you do your numbers and have buffers in place to allow for market changes and expenses,” she said.

“Buying property in the right areas will see more growth than holding off and saving money in your account - it’s better to take advantage of these opportunities and get in the sooner you can.”

While capital gains are not guaranteed - property is, after all, an investment as well as a place to live - buying in the right area could see better capital gains in the long term than the wrong area.

The ‘FOMO’ factor

The balance of capital gains versus saving up for a deposit to lower mortgage costs creates a ‘fear of missing out’ phenomenon, as traditionally capital gains have been strong among capital city markets.

This weighs heavily on first home buyers, according to BFG’s Mr Philipos.

“The support from the government with the scheme is direct action to address housing affordability. We have clients that would have had to delay their plans by 2-3 years without LMI waiver and the fear that by then - property prices would have increased even more drastically,” he said.

“It becomes a cycle in which when the savings increase, property prices have increased at a much higher rate.

“Reducing extra mortgage costs and government fees that are applicable during the purchase means borrowers, particularly millennials and now Gen Z, can get their foot in the market without being left behind.”

Aussie’s Mr Smith also highlighted the ‘FOMO’ factor.

“When it comes to the property market, the biggest cost could be delaying your decision to get into the market,” he said.

“You might discover you can get into your own home sooner than you thought.”

Contingent on capital gains

While strong capital gains in the capital cities have led to ‘FOMO’, past performance is not always an indicator of future performance.

Lid’s Mr Gray highlighted a case study where the FHLDS could be useful.

“If you have purchased with a 5% deposit, from there on the property does the heavy lifting of saving for you. If the $600,000 purchase grows at 7%, then in 10 years' time your property will be worth over $1,000,000,” he said.

“I know that I would rather be paying off my own mortgage (especially when interest rates are so cheap) rather than paying rent and helping pay down someone else's mortgage.”

However, the CoreLogic home price index for October indicated prices have fallen for their fifth straight month, dragged down by our two biggest cities. Sydney prices were down 1.6% on the quarter, while Melbourne’s were down 3.3%. However, these falls have yet to wipe out capital gains made over the year, meaning property is still a long-haul investment.

Owing more on your property than it’s worth is called ‘negative equity’. Of course, this is only a ‘paper loss’ rather than a realised loss. Nonetheless, this is why it’s important to buy in the right area and do all your checks and balances, which is admittedly true for any property.

FHLDS property price caps

The most recent openings for new builds saw the caps raised almost across the board. The price caps are now:


'New Home Guarantee' property price cap

NSW – Capital City and Regional Centre


NSW – Other


VIC – Capital City and Regional Centre


VIC – Other


QLD – Capital City and Regional Centre


QLD – Other


WA – Capital City


WA – Other


SA – Capital City


SA – Other


TAS – Capital City


TAS – Other


Australian Capital Territory


Northern Territory


Jervis Bay Territory & Norfolk Island


Christmas Island & Cocos (Keeling Island)


Source:'s two cents

The FHLDS provides another useful leg-up to first home buyers struggling to put together a deposit. On a $600,000 home, LMI could potentially cost in excess of $20,000, and the Scheme eliminates that. Ultimately, borrowers are still paying interest on 95% of the home’s value as opposed to the usual 80%. This could add up to thousands of dollars extra in interest over the life of the loan - borrowers will need to weigh that up with any potential capital gains made by entering into the market sooner.

The Scheme also has a couple of arguably stifling restrictions. Borrowers might be restricted in having an emergency fund ‘buffer’, because the Scheme wants you to use all your savings - such a buffer could prove useful down the track if home loan interest rates rise. Additionally, the new wave of the Scheme is limited to new builds, which as experts have pointed out, are likely located far from city centres and might have negligible capital gains. However, at the end of the day, first home buyers need a place to live when renting isn’t cutting it anymore - the FHLDS allows them to achieve their ‘Australian dream’ sooner, which is admirable in itself.


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 November 2020. 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 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure,, Performance Drive 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 is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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Harrison joined Savings in 2020. He is an experienced journalist, with previous stints at News Corp and financial comparison site Canstar. With a keen interest in personal finance, Harrison is passionate about helping consumers make more informed financial decisions.

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