The First-Home Buyers 5% Home Loan Deposit Scheme Explained

As a first-time home buyer in Australia, one of the biggest hurdles you’ll face is coming up with a substantial deposit. Traditionally, lenders have required a deposit of at least 20% of the property’s value, but what if you could secure your dream home with just a 5% deposit? That is possible through the First Home Guarantee, formerly known as the First Home Loan Deposit Scheme and popularly called the “First-Home Buyers 5% Deposit Scheme.” Today, let us help you explore this program.

What Is the First Home Guarantee & How Does It Work?

This government-backed initiative makes homeownership more accessible for Australians looking to purchase their first home. It enables eligible first-home buyers to own a property with as little as a 5% deposit without spending for a Lenders’ Mortgage Insurance (LMI), which lenders often require for home loans with lower deposits. 

Under the First Home Guarantee scheme, the Australian government guarantees up to 15% of the property’s value, bridging the gap between your 5% deposit and the typical 20%. For example, if you’re purchasing a $500,000 house in Hobart, you’d only need to contribute a $25,000 deposit (5%) because the government would guarantee $75,000 (15%) of the loan amount. Your home loan won’t incur LMI costs, which can save you thousands of dollars in the upfront costs of buying a home.

Who Is Eligible for the First Home Guarantee?

To be eligible for the First Home Guarantee or the First-Home Buyers 5% Deposit Scheme, you must meet the following criteria:

• You must be an Australian citizen, at least 18 years old (from July 1, 2023, permanent residents will also be eligible).
• You must be a first-home buyer who has not previously owned or had an interest in a residential property in Australia.
• You must have a taxable income below the specified thresholds (currently $125,000 for individuals and $200,000 for couples).
• You must purchase a property that falls within the specified price caps for your chosen location (In Tasmania’s capital city/regional centre, the property price cap is $600,000, while it’s $450,000 for the rest of the state).
• You must buy a property that falls within the specified property types: an existing apartment, house or townhouse, an off-the-plan property, a house-and-land package, or land & a separate contract to construct a home.

Note that the First Home Guarantee is subject to an annual allocation of places, which means it’s available on a first-come, first-served basis. For the entire FY 2023-24, there will only be 35,000 available places. So, if you’re interested in taking advantage of this scheme, it’s best to act quickly and consult a mortgage broker or lender to ensure you meet all the eligibility requirements.

How to Apply for the First-Home Buyers 5% Deposit Scheme

To apply for the First Home Guarantee or First-Home Owners 5% Deposit Scheme, you’ll need to secure a home loan with one of the participating lenders or through a mortgage broker. They will assess your eligibility and guide you through the application process, which typically involves providing documentation such as proof of income, employment details, and evidence of your deposit savings.

Once approved, the lender will work with the National Housing Finance and Investment Corporation (NHFIC) to facilitate the government guarantee, allowing you to proceed with your home purchase without the burden of LMI.

Take Note of the Risks

While the First Home Guarantee (formerly First Home Loan Deposit Scheme) is beneficial for first-home buyers, it may come with a few risks you should note: 

Larger Loan Amount

With a smaller 5% deposit, the amount borrowed will be larger than paying the typical 20% deposit. This means the total interest paid over the life of the loan will likely be higher since interest is calculated on the outstanding loan balance.

Higher Mortgage Repayments

Because the loan amount is larger with only a 5% deposit, the minimum required mortgage repayments will also be higher. This could put more financial pressure on borrowers and make it harder to manage the loan repayments.

Loan Term Limitations

Most lenders have a maximum loan term of 30 years. With a larger loan, you may need to take the full 30 years to pay it off. You will likely have less flexibility than those with smaller loans who can pay them off sooner.

Difficulty Building Equity

With only 5% equity in the property from the deposit, it may take longer for you to build substantial equity and benefit from potential property value appreciation.

Risk of Negative Equity

If property values decline shortly after purchase, there is a higher risk of the loan balance exceeding the property’s value, putting you in negative equity.

Limits on Refinancing or Selling

Having little equity can make it more difficult to refinance to a better loan later or to sell and move properties, as more equity is generally required for these transactions.

Let Us Help You Explore the Scheme Further 

The First Home Guarantee is a game-changer for many first-time home buyers in Australia. You can overcome one of the most significant financial hurdles and secure your dream home with as little as a 5% deposit. However, it’s essential to remember that while the First Home Guarantee can help you enter the property market, it is still a significant financial commitment and may come with a few risks.

So, if you’re a first-time buyer, don’t hesitate to contact us to help you explore this exciting opportunity and decide whether it’s the most suitable government scheme. Our mortgage brokers in Hobart will help you discover other available government grants and cost-efficient first-home buyer loans in Australia. You can also check out our Ultimate First-Home Buyer Checklist to learn more about your property journey.