The catch with the First Home Loan Deposit Scheme

Coming up with 20% of the property's price is a big challenge for many would-be buyers, but is the First Home Loan Deposit Scheme the solution?

What we know

The Coalition promised it would do just that if it won the May election and the details of its First Home Loan Deposit Scheme were announced in October.

The scheme will allow up to 10,000 first home buyers a year to get a home loan with a deposit of just 5%, instead of the standard 20%.

Normally, if you wanted to borrow with a deposit of less than 20% you'd have to purchase lenders mortgage insurance to cover the shortfall. The costs of this will vary, but as a rule of thumb the insurer Genworth estimates you'd pay around $16,000 on a $500,000 home loan with a 5% deposit ($25,000).

Under the scheme, the government will guarantee the 15% shortfall, effectively eliminating this extra cost. That's a substantial saving and you may be able to buy your home much sooner. The guarantee will stay in place until you have paid out the loan or paid it down to 80% of the home's value, have refinanced or you no longer live in the property.

But, of course, there's a catch. In fact, there are several.

The catch

First, you'll have to convince the lender that you can afford the repayments on a 95% loan-to-valuation ratio. You'll be borrowing more than if you had saved the full 20% deposit.

The scheme is also limited to 10,000 loans each year offered on a first-in-first-served basis from January 1 for this financial year, with a further 10,000 available from July.

The scheme is also means-tested. You must be buying your first home as an owner-occupier and you can't already own an investment property. Your taxable income must be less than $125,000 for a single and $200,000 for a couple and the loan must be for principal and interest.

There are also limits on the home price.

Higher prices apply to capital cities and major regional centres with populations of more than 250,000 such as the Gold Coast, Newcastle and Lake Macquarie, the Sunshine Coast, Illawarra (Wollongong) and Geelong. The government says this recognises that dwellings in highly populated centres cost significantly more than homes in regional areas.

Even so, some of the caps, in particular those for Sydney ($700,000) and Melbourne ($600,000) will be on the low side for some first home buyers. The government is clearly aiming at lower to middle earners with this scheme and assumes their first homes will be relatively modest and you can't have owned another property.

A panel of 27 lenders was appointed in late 2019, with NAB and CBA having started on January 1 and 25 smaller lenders joining the lending panel from February 1.

Further assistance

The scheme is on top of existing government assistance for first home buyers such as state government first homeowner grants and stamp duty concessions.

The federal government also has a First Home Super Saver Scheme, which allows you to save for your first home through your super account. You can save up to $15,000 a year (a limit of $30,000 overall) and withdraw it when you buy your home.

This can be more tax effective than saving outside super and your money is locked away until you buy your home or retire, so there's no temptation to spend it.

Did you know

Around 110,000 first home buyers entered the market in 2018, suggesting the scheme will have only a marginal effect in making first home ownership easier.

Best-case scenario

The scheme can substantially reduce the time needed to save for your first home deposit. But on the flip side, you'll be borrowing more so your repayments will be higher and you will end up paying more interest over the life of the loan.

Worst-case scenario

Low-deposit loans are inherently riskier than standard home loans. If the market turns down again, borrowers could find themselves with negative equity in their homes.

The wild card

Critics have argued that these types of government schemes often just drive up house prices rather than improve affordability.

However, the limited nature of this scheme, and the price caps, suggest that is unlikely this time around.

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