Your Guide to the First Home Loan Deposit Scheme

Jan 14, 2020

The First Home Loan Deposit Scheme (FHLDS), allows eligible first home buyers to buy with a little as a 5% deposit. Find out how it could help you buy your first home. Updated: 7 October 2020.

First Home Loan Deposit Scheme (FHLDS)

One of the most exciting outcomes of the 2019 federal election was the promise of additional assistance for first home buyers struggling to pull together a deposit for their first home. With the recent announcement of the 2020-21 budget, these benefits have been increased, with the additional benefits available until 30 June 2021. Launched on January 1, 2020 The First Home Loan Deposit Scheme (FHLDS), allows eligible first home buyers to buy with a little as a 5% deposit.

While the ability to buy with 5% has always been possible (depending on specific lenders’ eligibility), the scheme removes the need to pay Lender’s Mortgage Insurance (LMI) with the Government effectively acting as a guarantor for the remaining 15% of the deposit.

Eligible purchasers will still need to borrow and pay interest on the 95% loan, but it means you could save thousands by not having to pay LMI.

What were the changes to the FHLDS announced in the 2020-21 budget?

As part of the 2020-21 budget, the Federal Government announced it was extending the First Home Loan Deposit Scheme until June 30 2021. The extended scheme includes:
  • An additional 10,000 eligible first home buyers will be able to use the scheme to purchase a newly built home.
  • For these 10,000 first home buyers, the price cap has also been increased from $600,000 to $850,000.

What is LMI or Lenders Mortgage Insurance?

In Australia, LMI allows home buyers with less than 20% deposit to purchase a property. However, because a loan with a deposit of less than 20% is considered a risk, LMI protects the lender if you can’t repay the loan.

Depending on how much your loan is, and what percentage you can use as a deposit (also known as your loan-to-value ratio or LTV ration), LMI can cost you anywhere between a few thousand and tens of thousands of dollars — however it could allow you to enter the property market sooner and start saving in other ways (e.g. stop paying rent and increase equity in your new home).

Remember that LMI protects the lender, not you.

What are the benefits of the First Home Loan Deposit Scheme?

Thanks to the FHLDS, eligible first home buyers with a deposit between 5% and 20% will be able to purchase a home sooner. Because technically, you can save 5% deposit in a quarter of the time it takes to save 20%.

If eligible for the FHLDS, the government guarantees the difference between your 5% deposit and a full 20% deposit, meaning you don’t pay LMI as the risk to the lender is removed.

Importantly, you can also utilise this scheme in conjunction with other government incentives, like the First Home Super Saver Scheme and the First Home Owner Grant.

How does the First Home Loan Deposit Scheme work?

Prior to the FHLDS, if you wanted to buy a $600,000 property as a first home buyer, and avoid paying LMI, you would need to have saved a deposit of $120,000 (20% deposit) as well as adequate funds to pay to other upfront costs like stamp duty, conveyancer fees, etc.

If you had less than this amount, LMI would be added to your loan. This decreases the amount going directly to your deposit and you would also pay interest on this for the life of your loan. For example, on a $600,000 property — with just a 5% deposit — LMI works out at just under $23K added to your total loan amount.

The First Home Loan Deposit Scheme guarantees the shortfall of your 20% deposit, meaning you could buy this property with just a 5% cash deposit of $30,000. The government will guarantee the remaining 15% to avoid LMI, saving you just under $23K (plus interest).

Who is eligible for the First Home Loan Deposit Scheme?

The FHLDS will be limited to 10,000 eligible first home buyers each year who apply through participating lenders. There are also an additional 10,000 places available for those buying newly built homes between 6 October 2020 and 30 June 2021. Additionally:

  • You must be an Australian citizen at least 18 years of age
  • Singles must earn less than $125,000, and couples less than $200,000 a year
  • The value of the property must not exceed $600,000 — however if you›re purchasing a newly built property between 6 October 2020 and 30 June 2021 then the scheme applies on properties up to $850,000.
  • You must have a deposit of between 5 and 20% of the property’s value
  • Your mortgage needs to be an owner-occupied loan with principal-and-interest repayments
  • Your mortgage must be with a pre-approved FHLDS lender, who will apply to the government on your behalf
  • You must intend to live in the property as your principal place of residence
  • Couples must be married or de-facto

Use the National Housing Finance and Investment Corporation’s (NHFIC) online tool to find out whether you meet the eligibility criteria.

How do I apply?

Applications can be lodged through participating lenders.

For more information, visit the NHFIC’s FHLDS website.

If the FHLDS isn't right for you, read our First Home Buyer's Guide to Government Incentives or enquire on one of our current projects and we can talk you through the steps.

Originally published 7 January 2020.

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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. We make no warranty as to the accuracy, completeness or reliability of the information, nor do we accept any liability or responsibility arising in any way from omissions or errors contained in the content. Caydon recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.