The First Home Loan Deposit Scheme is a government initiative designed to help eligible Australian first home buyers with deposits as low as 5% to get a loan, without needing to pay for lenders mortgage insurance (LMI).
→ Related article: How does the First Home Deposit Scheme Work?
Canstar finance expert Steve Mickenbecker said while the scheme may help some Australians enter the property market sooner – with potential savings of tens of thousands of dollars on LMI premiums over the life of their loans – that prospective applicants should do their homework, and think carefully about whether the scheme is right for them.
“First home buyers should still consider if they can afford a loan,” Mr Mickenbecker said. “And it’s important not to overstretch, too, as repayments will increase if interest rates go up.”
It is also worth keeping in mind that taking out a home loan with a lower deposit could mean paying interest on a larger sum, potentially making it more expensive as a result.
The first round of the First Home Loan Deposit Scheme, administered by the National Housing Finance and Investment Corporation (NHFIC), kicked off on 1 January, 2020 with all the 10,000 places on offer reserved in a matter of months.
One of those successful applicants was primary school teacher Emma Anderson. She was able to secure a home loan with a 10% deposit through her chosen lender Teachers Mutual Bank to buy a property in Toongabbie in western Sydney.
Ms Anderson said by using the scheme she could put forward a smaller deposit and avoid paying LMI, which meant she had more money in her pocket to pay for minor renovations and new furniture for her new home.
Steps to apply for the First Home Loan Deposit Scheme
With another 10,000 places now available under the First Home Loan Deposit Scheme, it may be worth considering if you are in a position to apply, and whether doing so would suit your needs and budget.
For those wanting to take the plunge, let’s take a look at some of the key steps in the FHLDS application process, and what you may be able to do along the way to help secure your spot:
Step 1: Closely check your eligibility
Applicants must meet a set of criteria to be eligible for the FHLDS, including earning a certain amount of money. Ms Anderson said she checked to see if she fulfilled these requirements by doing her own research, as well as asking her mortgage broker for assistance. However, it would ultimately be up to your chosen lender to determine your eligibility for the scheme when you apply.
Here are some quick facts about who may be able to qualify, if they met all of the following criteria, according to the Australian Government:
- Australian citizens who are least 18 years old.
- Applicants must be first home buyers who have not previously owned or had an interest in a residential property, either on their own or jointly with someone else (this includes body corporate and company-owned properties, regardless of whether it was an investment or owner-occupied property and whether it was ever lived in).
- Singles with a taxable income of up to $125,000 per year and couples with taxable income of up to $200,000 per year (incomes would be assessed for the financial year before the one in which the loan is entered into).
- Couples are only eligible for the scheme if they are married or in a de-facto relationship. So other people such as siblings, a parent and child or two friends buying together would not eligible for the scheme.
- Applicants must have a deposit of at least 5% – but less than 20% – of the property’s value.
- Loans under the scheme generally require scheduled repayments of the principal and interest of the loan for the full period of the home loan contract.
- Applicants must intend to move into and live in the property as their principal place of residence (so they must be owner-occupiers, not investors).
More detailed information can be found on the NHFIC eligibility checker webpage, including additional criteria, relevant dates and requirements for different property types.
Step 2: Work out how much of a deposit you may need
To ensure the FHLDS is “only available for the purchase of a modest home”, the Australian Government has capped the price of the homes eligible under the scheme. These caps (or property price thresholds) vary according to the state and region where you want to buy. You can find out what property price thresholds apply in each state or region on our dedicated page.
If you know what price cap applies to the region you are looking to buy, you may then be able to determine the approximate deposit you will need under the scheme. For example, the price threshold to buy an existing property in Sydney under the FHLDS is at $700,000. So, you would need a minimum deposit of $35,000 for that price (with a 5% deposit), and less than $140,000 (less than a 20% deposit).
Ms Anderson said knowing that she already had a decent enough deposit ready to go before applying for the scheme helped give her more confidence going into the process.
“I’m not sure if having that larger deposit [more than 5%] necessarily helped me gain approval, but it put me into a good position when comparing my options,” she said.
As outlined in the eligibility criteria above, the FHLDS currently requires applicants to have a minimum deposit of at least 5% made up of genuine savings. The NHFIC said genuine savings refers to amounts either saved or held over a period of time. You will need to speak with your lender to find out whether the deposit you have is made up of genuine savings for the purposes of its lending criteria and the scheme. You will also need to show evidence of these genuine savings, such as bank account statements for a savings or term deposit account.
Step 3: Have your documents ready and lodge your tax return early
Along with showing evidence your deposit is made up of genuine savings, you will also need to provide some other forms of important information to your lender, to improve your chances of reserving a place under the scheme.
According to the NHFIC website, this information may include:
- Your full name (legal name as it will appear on the title of any property you purchase)
- Your date of birth
- Your Notice of Assessment (NOA) from the Australian Taxation Office for the previous financial year. For scheme reservations made from 1 July 2020 to 30 June 2021, the relevant NOA is the 2019-20 income year.
Your lender may also request other documents or information from you, depending on your circumstances and their processes.
The NHFIC recommend that you collect and have the above information available when you first contact your lender.
CUA Chief Customer Officer Megan Keleher said it was vital for applicants to get their finances and paperwork in order early, because there were only a limited number of spaces available under the scheme. This would include giving themselves enough time to receive their Notice of Assessment back, so they could finalise their application.
“For many people, this may mean waiting a few weeks until you can complete your application, so it is worthwhile being organised and ready to lodge [your tax return] as soon as you can,” Ms Keleher said.
According to Domain, some lenders may still allocate a scheme spot without a completed tax return, as long as the information comes through as soon as it’s available to back up the claims made about income and expenses in the application. You will need to check with your chosen lender to see if this is the case.
Step 4: Apply for a loan via a participating lender
Once you have checked your eligibility for the scheme, and have your paperwork and deposit ready to go, your next step would be to apply for the FHLDS through one of the scheme’s participating lenders (or via their authorised representatives, such as brokers).
To work out which lender to apply to, Ms Anderson said her broker helped her to compare some of the loans on offer from the different participating lenders in the scheme.
“My broker gave me a list of a couple of different loans available, including some tailored towards teachers, and then I chose which one suited me best from there,” she said.
Once you have chosen a participating lender, you would then need to make an appointment online or over the phone with the lender or their broker in order to apply. Your chosen lender or broker would then assess if you are eligible for a spot in the scheme. If you are, and there’s a spot available, they would reserve a place on the scheme for your loan. If there is no spot available, you could ask if they have a waiting list, or if you could reapply for the next round of the scheme.
The NHFIC has encouraged first home buyers (and those advising a first home buyer) to consult with a participating lender and seek their own independent financial and legal advice on how to structure their loan arrangements in a way that suits their own personal circumstances.
Ms Anderson decided to choose a fixed rate loan through her chosen lender for the first few years so that it would help her “get into a routine of paying off a set amount”. She said the fixed loan rate was also one of the most competitive on offer from her choice of lenders, so locking that in would also potentially save her money down the line, if rates were to increase during the fixed-rate period.
It is important to note that all participating lenders have committed not to charge eligible first home buyers higher interest rates than equivalent borrowers outside of the scheme. This means that you should not be charged a higher interest rate from a lender just because you are applying for a loan under the scheme.
Step 5: Obtain conditional approval
Once you have your place reserved in the scheme, you will have 10 days to obtain conditional approval for a loan (also known as pre-approval) from your chosen lender. This will determine exactly how much you can borrow and therefore how much you can spend on a home, provided you meet certain conditions. These conditions may include paying off an existing debt or providing further documentation (for example, a professional valuation of a property you would like to purchase), depending on your circumstances.
To get a pre-approval from a participating lender, they will typically need to check your finances and assess whether you’ll be able to repay a loan.
Step 6: Find a home and sign the contract
As soon as you have been granted your conditional approval, you will then have 90 days to find, negotiate for and sign a contract on a property, ensuring the home is priced below the property price threshold for its location. The NHFIC said it would be wise to stay in contact with your lender during this time and to update them regularly.
→Related article: Putting your best foot forward: how to make an offer on a house
Ms Anderson said because her broker gave her a rough estimate on what she may be able to borrow through the scheme, she was able to look for properties around that mark before applying, making it easier to find the right property she wanted within the 90 days.
“That was plenty of time for me, and once I did find the home I wanted it was a really quick turnaround to get the contract signed and organised,” she said.
The NHFIC said that if you are unable to find a property and enter into a contract sale prior to the expiry of your pre-approval under the scheme, you may be entitled to an extension for another 90 days. However, you will need to contact your participating lender for further details on whether you are eligible for an extension.
Step 7: Buy the home and move in
Once you have signed a contract to buy your chosen home, you then have up to 30 days for the settlement period – to allow time for the bank to finalise the loan, and for the usual legal processes that allow a house contract to settle. You must then be living in the house within six months of settlement.
Ask questions and seek help if needed
When applying for the First Home Loan Deposit Scheme, Ms Anderson said it’s important to keep asking your broker or lender questions about the process so they can outline exactly what you need to do to help secure your spot. She said she also found it important to ask the lender to give you all the information you need about the available loans they have on offer through the scheme, so you can better understand what will work best for you.
“The whole application process can be overwhelming and it’s a huge commitment, so asking questions and also reaching out for help from a broker or from someone you trust who works in finance or property can help make it that bit easier,” she said.
*Lenders may not be on the FHLDS participating lenders list. Note: Keep in mind that you will typically also need to meet the lending criteria of the bank you apply to.