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First Home Loan Deposit Scheme [Buy with a 5% Deposit, No LMI]

There’s more to it than you think
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The First Home Loan Deposit Scheme (FHLDS) has sparked a lot of conversation from experts in the property industry. 
This scheme was set up to help young Australian’s buy a home sooner.
(But there’s plenty of speculation the deposit scheme might actually increase prices) 
In this guide, we’re going to go through the First Home Loan Deposit Scheme

Specifically, how it can help (or hinder) you from buying a home.

How does the First Home Loan Deposit Scheme work?

From 1st January 2020, the Australian Government will be rolling out the First Home Loan Deposit Scheme. 
Ten thousand borrowers will be eligible for this scheme with $500 million in equity allocated to the National Housing Finance and Investment Corporation (NHFIC). 
The hope is to make housing no longer a distant dream for Millenials. 
Yet nothing is as simple as it seems.
There has been backlash from property market gurus, saying that the scheme may cause property prices to go up, or put first homeowners under extra, financial stress.
We’ll get to this soon. 
But for now, let’s take a look at how the scheme works.
The Australian Government has planned the First Home Loan Deposit Scheme as an aim to assist first home buyers.
The scheme allows first home buyers to purchase a property with a 5% deposit. 
deposit scheme-first-home
Without paying Lenders Mortgage Insurance (LMI).
The government will guarantee the remaining 15% of the property value, bringing the total up to 20% in the eyes of a lender.
But of course, there are eligibility requirements.
In terms of income, only those earning up to $125,000 are eligible.
And for a couple’s combined income of $200,00.
As well as other requirements including cost, eligibility and personal criteria.
The process:

  • ✅ Eligible buyers will need to apply to the First Home Buyer Loan Deposit Scheme through the National Housing Finance and Investment Corporation (NHFIC). 
  • ✅ Once you have shown your eligibility and are approved, you will be able to take out a loan.
  • ✅ The lender will organise this, and the government will act as your guarantor.
  • ✅ Your lender will do the usual checks, but it will be easier to go through the process, without having a 20% deposit.


What’s the difference between this type of loan and a regular mortgage?

Usually, if you are buying a property with less than 20% deposit, you will have to pay Lenders Mortgage Insurance (LMI).
LMI is to cover the lender if you can’t repay the mortgage.
Instead, with the First Home Loan Deposit Scheme, the government will cover the LMI. So you won’t need to add it to your loan. 
LMI can cost between $8,000 to $15,000 on top of your loan, depending on the size of your mortgage. So taking this out of the equation can be a significant saving.
If you decide to apply for the scheme, you will receive government support throughout the loan. 
Yet if you choose to refinance your loan, the support will no longer be there.
So this means if you refinance your loan and you still have more than 80% of the property value to pay back. 
You will be hit with lenders mortgage insurance from your new lender.  

How do I know if I’m eligible for the first home buyers scheme?

Eligibility and criteria will be determined by where you live and your personal circumstances.
Property price caps will also be set in place, around different thresholds in line with capital cities and regional areas.
The below table outlines the price thresholds for the First Home Loan Deposit Scheme. 
House price cap
There is also a free tool to help work out the maximum price cap here.
first home loan deposit scheme eligibility (1)  

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What determines the higher price caps?

Throughout the country, some regional centres are allocated higher price caps. This means that the buyers can purchase at a higher price and still be eligible for the deposit scheme.
The population of the region determines this. 
The government outlines that regional centres with over 250,000 people like the Gold Coast, Geelong and Newcastle will have a higher price cap. 
Dwellings in these larger regional centres are more expensive than other areas. 
So if the property price is higher, the available rate for the grant will be higher to accommodate.

What about my personal eligibility criteria?

To get access to the First Home Loan Deposit Scheme, there is a list of criteria around income.

First Home Loan Deposit Scheme eligibility

To be an eligible first home buyer for this scheme, you will be required to fulfil the following:

  • You have never held property in Australia, including a lease of land or company title.
  • You are 18 years of age or above.
  • An Australian citizen.
  • You satisfy the income test.


Am I eligible for the First Home Loan Deposit Scheme?

  • If you are applying alone, your income will be up to $125,000
  • If you are applying as a couple, your combined income can be no more than $200,000
  • Owner-occupied loans are to be set up for principle and interest.

Further details about the loan can be found in the Investment Mandate here.

How will borrowers be assessed?

Borrowers will be assessed by their income, loan amount and previous history when it comes to buying a house.
For your loan to be eligible, you will need to fit criteria.

  • ✅ A loan is eligible if the Loan to Value (LVR) ratio is between 80 to 95%
  • ✅ The value of the property doesn’t exceed the price cap for the area.
  • ✅ An eligible lender will provide you with the loan.
  • ✅ Two borrowers applying must be either a spouse or defacto of the other borrower.
  • ✅ Two borrowers applying must both be eligible as first home buyers.
  • ✅ The loan is for a residential property.
  • ✅ There is a maximum of two borrowers applying, no more.
  • ✅ The residential property subject to the loan must be owner-occupied.
  • ✅ The loan term does not exceed 30 years.

What other government schemes can I use alongside the First Home Loan Deposit Scheme?
While you’re completing the First Home Loan Deposit Scheme, you can use the First Home Super Saver Scheme alongside this.
The Super Save Scheme is for those wanting to put extra super contributions in, which will go towards a deposit. 
You can make a maximum of $15,000 of extra super contributions and then withdraw this money to put towards the 5% deposit.
As an individual, the maximum you can withdraw from your Super Saver Scheme is $30,000 and for couples $60,000.
The First Home Owner Grant can also be used. However, this is only for newly built properties.

What are the risks, and happens if you default on your loan?

Of course, the less money you put down on a deposit, the higher the risk. 
With more money owing on your loan, this leaves more significant repayments for you to pay off.
So the loans taken out under the First Home Loan Deposit Scheme could add extra financial pressure to borrowers. 
Some of the drawbacks and risks of this loan include:

  • Borrowers will need to pay more interest throughout the loan when putting down a low deposit. 
  • The overall interest on the loan will be much higher. However, if a borrower is anticipating their income to go up, then this may not be an issue.

Will the scheme help first home buyers?

Experts opinions are split. 
And it’s a tricky question to answer.
Taking LMI away definitely makes it easier to buy a home for first home buyers.
But the thing is, LMI isn’t an upfront cost. 
It can be added to your loan and paid back over time. So it isn’t necessarily a deal-breaker when it comes to buying a home.
Really, those benefiting from the scheme are the ones that can already buy a property, regardless.
Another drawback of the scheme is that only 10,000 borrowers can apply for it. 
According to the ABS, over the past 12 months, there were 110,000 first home buyers. So 10,000 of these is a tiny fraction in comparison.

What about putting down a low deposit in a falling market?

A falling market with a low deposit loan can leave you in a sticky situation.
If you put down a 5% deposit, and then all of a sudden the price of property drops. You will have negative equity.
In this situation, your mortgage will be more than the value of your property.
The result of this can make it hard to sell the property or even refinance.
Be aware of the risks associated with putting down a low deposit loan. While again, it isn’t a deal-breaker, it’s something to be aware of.

Will the First Home Loan Deposit Scheme Increase Property Prices?

Experts say that the new grant will push prices up. 
The Australian Financial Review has outlined that banks may want to push interest rates up. 
Higher risk comes with a 5 per cent deposit.
Further sources have also stated that it’s likely many first home buyers will be stung by higher interest rates under the scheme. 
The price cap could also directly affect properties that sit just below it, bringing the prices up. 
…And all of this could cause homebuyers to pay much more for a property than what they would save in LMI.
But all of this is speculation. My advice is if you’re considering this scheme, speak with your mortgage broker and explore the options.
Watch the market closely and crunch the numbers.

Is there an opportunity to buy now?

The deposit scheme begins in January 2020. 
It’s likely that we will see a rush of first home purchases at the beginning of the year. This is due to the first-in, first-served basis creating demand.
When it comes to types of properties first home buyers will be looking for:

  • ✅ For capital cities in line with the price cap, buyers will be looking for one and two-bedroom apartments. 
  • ✅ In outer regions and fringe suburbs, smaller houses will be the focus.



How much interest will I pay as a borrower?

It is hard to say. It’s likely that the same interest rates will be offered to borrowers, no matter what their circumstance is. 
However, this isn’t guaranteed until we watch the roll-out of this scheme.
When we compare a 5% deposit to a 20% deposit side by side, the initial upfront costs aren’t crazy. 
interest difference
You’re looking at an extra $146 per fortnight.
But over 30 years this ends up being $34,961.
These calculations were figured out using a 4% interest rate. 
However, if interest rates go up, the overall interest paid could be than this.

The First Major Lender Has Been Approved

The first significant lender as part of the NHFIC has been announced.
Drumroll, please…
It is the National Australia Bank (NAB). 
NAB is the first lender part of the panel under Australia’s new First Home Loan Deposit Scheme.
But wait.
If you don’t think NAB is for you, the good news is, a positive response from many other lenders has been seen. 
So watch this space, because the roll-out of other lenders will continue.  
As part of this scheme, only two major lenders can be on the panel. These two will be able to receive up to 50 per cent of the guarantees per financial year.
Other non-major lenders will also be appointed, and each lender will be selected within specific criteria.

So what’s NAB offer?

NAB has pledged to offer competitive interest rates just like other customers outside of the scheme. Guarantees will be provided from 1 January 2020.
If you are thinking of applying for the scheme, you will need to wait until this date, and apply through the lender directly or a broker.

How will the scheme affect which lender I go with?

The Australian Government has reinforced that there will be a spotlight on smaller lenders. The roll-out of which lenders will be a part of the scheme will be released next year. 
However, we hope to see some healthy competition between the lenders to get first home buyers the best rates and deals possible.
The smaller banks will benefit from this scheme, with their aim to get more first home buyers into the market.

Our opinion and the verdict?

Look, the First Home Loan Deposit Scheme could be useful for the right buyer. 
Specifically for those who already had a plan in place to buy in early next year.
However, due to the competitiveness of it and the risk associated with it, it isn’t the perfect scheme.
So if you’re considering this deposit scheme, it’s worthwhile to really crunch the numbers and make sure that in the long term you can afford it. That is, should the market fall, interest rates go up or you need to refinance. 

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Approximately 40% of home loan applications were rejected in December 2018 based on a survey of 52,000 households completed by 'DigitalFinance Analytics DFA'. In 2017 to 2018 Hunter Galloway submitted 342 home loan applications and had 8 applications rejected, giving a 2.33% rejection rate.
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