The 5 per cent deposit scheme and First Home Guarantee, explained

Australia has spent a decade trying to invent a way for households to buy with less cash without pretending that LMI is a fun extra. The current answer is a family of Housing Australia guarantees, still widely searched as the First Home Guarantee and, in conversation, 'the 5 per cent deposit scheme'. The branding has shifted as governments have expanded places, tweaked income caps, and argued about whether this is housing policy or demand stimulus. The mechanics underneath are stable enough to explain.

You put in at least 5 per cent. A participating lender writes a 95 per cent LVR loan. The Commonwealth guarantees a slice of the lender's risk. You do not pay lenders mortgage insurance. You still owe the 95 per cent.

What the guarantee is doing

At 95 per cent LVR, a normal loan would require LMI because the lender's buffer against a price fall is thin. The guarantee stands in for that buffer. It is a contingent liability for the government, a cheaper entry for you, and still a large loan. If property prices fall 10 per cent the day after settlement, you are 5 per cent in the red before costs. The scheme does not insure you.

Eligibility is a checklist, not a vibe

Typical filters, which you must verify on Housing Australia and the lender's page because they move:

• Citizenship or permanent residency.
• First home buyer status, with limited exceptions in some streams (for example, some previous owners in hardship or regional products).
• Taxable income under a cap, often assessed on the previous year's notice of assessment, with coupled caps higher than singles.
• Property price at or under a cap that varies by city, regional area and sometimes state.
• Owner-occupier, usually with a requirement to move in within a set period.
• A participating lender — not every bank, not every non-bank.

Places can be limited. When a financial year's allocation is gone, it is gone until the next policy tweak. Do not sign an auction contract on the assumption a place will exist.

What 5 per cent does not pay for

Stamp duty, inspections, legal fees, lenders' establishment fees, and the furniture you will buy because the place echoes. Some states concession duty for first home buyers; some do not at your price point. Read stamp duty concessions. If duty is $25,000 and your deposit is $30,000 on a $600,000 home, you do not have a 5 per cent deposit; you have a shortfall.

Lenders still run serviceability at the buffered rate on 95 per cent of the price. High LVR plus high price is how first home buyers become the households who cannot absorb a rate rise. Use the scheme to buy a property you can hold, not the maximum the guarantee unlocks.

New homes, established homes, and other streams

Policy has at times favoured new dwellings, regional buyers, single parents, or broader 'help to buy' style shared-equity ideas. Shared equity is a different product: the government takes an ownership stake. Do not confuse it with the guarantee. A guarantee is not equity. You own the place; you also own all of the mortgage.

Construction and off-the-plan can be eligible with extra conditions. Construction loans plus a guarantee is a specialist file. Use a participating lender who has done one recently.

Process

Get a participating lender or a broker who actually places these files to confirm eligibility before you bid. Pre-approval should mention the scheme. After contract, Housing Australia's process runs in parallel with ordinary underwriting. Valuation still happens. If the valuer comes in under the cap you are fine; if the valuer comes in under the price, you have an LVR problem like any other buyer.

Worked sketch

Price $650,000 in a market where the cap allows it. Five per cent is $32,500. Loan $617,500. No LMI, which might otherwise have been around $10,000-plus capitalised. You have saved that premium and the interest on it. You have not saved the risk of a 95 per cent LVR. A 10 per cent market fall is a $65,000 paper loss on $32,500 of equity.

Questions to ask

• Which stream am I in, and are places still available this year?
• Income cap on my single or joint assessment, which year's NOA?
• Price cap for this LGA?
• Must the 5 per cent be genuine savings?
• Occupancy deadline and what happens if I need to relocate for work?

The scheme is a tool. Used on a modest property with a buffer, it is how some renters stop renting. Used to stretch into a suburb you can only afford on two overtime-heavy pays, it is how the old North Perth brokers would have winced. Check Housing Australia, then buy a house you can keep.

Price caps are a map, not a vibe

A cap of $900,000 in a capital city sounds roomy until you add parking, stamp duty, and the fact that the suburb you wanted has already cleared it. Regional caps are a different map. If you are bidding at $5,000 over the cap, you are not 'basically eligible'. You are ineligible. Vendors know this and some will not negotiate under a cap. Others will.

Participating lenders are not a secret club, but they are a list

Housing Australia publishes participating lenders. Your favourite brand may be missing. A broker who 'doesn't really do those' is telling you to find another broker, not to skip the scheme. Pre-approval should name the stream.

Places and financial years

When a year's places are exhausted, files in flight can still complete and new ones cannot. Do not take an auction as a given in June. If you need the scheme, a private-treaty contract with a finance clause is a kinder legal environment than an auction.

After you move in

Keep the occupancy evidence. If Housing Australia or the lender writes to confirm you live there, you want a boring paper trail. Do not list a spare room on a short-stay platform in month two unless you have checked the rules. Guarantees are not allergic to housemates in every case, but they are allergic to 'I never moved in'.

If you outgrow the place, selling or moving out can have scheme conditions. Read them before you treat the first home as a one-year trade. The scheme's job was to get you in, not to fund a flip.