How price increases could have been avoided with the government’s 5% deposit scheme

Any effort to help first-home buyers get a foot on the property ladder is welcome, but could the 5% deposit scheme work harder to help the nation’s overall goals? 

Earlier this week, the federal government announced that its expanded Home Guarantee scheme will start from 1 October 2025, rather than in 2026 as it was originally announced.   

The scheme will see the government guarantee a portion of a first-home buyer’s home loan, so they can get into the property market with a lower-than-average deposit and avoid paying lenders mortgage insurance (LMI). Buyers will be able to buy with as little as a 5% deposit.

Substantial savings for home buyers

The savings here are expected to be significant. In 2025, first-home buyers who take out lenders mortgage insurance incur an average of $25,000 in additional costs. Some first-home buyers are paying as much as $42,000 in LMI to get into the property market. 

In the first year alone, first-home buyers using the scheme are expected to avoid around $1.5 billion in potential LMI costs, according to government modelling. 

Purchase price caps will apply depending on the location where a buyer is looking to purchase, but there are no income caps on eligibility. 

Industry insiders have welcomed the scheme while also acknowledging that this will have the effect of putting more money into certain market segments, therefore pushing prices up. 

While that will cause a level of short-term pain for buyers, the Housing Industry Association commented that in the long-term, this program is expected to contribute to moderating house price growth. 

That’s because first-home buyers who decide to buy a new home, rather than an existing one, will contribute to driving the production of new homes and therefore have a positive impact on supply. 

“There can be no doubt, that at least in the short term, that this announcement will see home prices rise. Removing the requirement for LMI provides FHB’s with an extra $25,000 in their deposit and will see more FHBs active in the market from 1 October 2025,” said HIA chief economist Tim Reardon. 

But Mr Reardon also noted that approximately a third of all new homes are bought by FHBs. LMI, he argued, reduces FHBs ability to gain a loan, and therefore “reduces the number of new homes commencing construction”. 

So, how long will it take to see positive impacts flow to the market? 
 
According to the Treasury, it’s estimated that it will six years for the short-term uplift in prices to be offset by the increase in supply that will lower those prices. 

Mr Reardon estimates that the time-frame is closer to three years, due to the ongoing nature of the scheme. 

While similar impacts were seen with government incentive programs such as HomeBuilder, they operated for a fixed-term and therefore had a “draw-forward” impact, incentivising buyers to act and therefore putting more participants in the market at a particular time. 

With the Home Guarantee, buyers will not have to change their buying plans in order to take advantage of the scheme. 

“The consequence of this difference in assumptions is that HIA estimates the short-term appreciation of home prices in FHB markets will be relatively small,” Mr Reardon said. 

A missed opportunity?

But whether it takes six years or three years for the gains in new homes to offset the impact of price increases, the question for some is: if an integral part is increasing supply, why not make it the target of the scheme? 

According to Dennis Vertzayias, partner and director of Laver Residential Projects, the scheme is ultimately to be commended but could have done more. 

“In the long term there’s no question that it will have a positive impact in getting more people into homes. However, where I think there’s probably fallen short, is that it should really be directed to brand new properties,” he said. 

In Mr Vertzayias’ view, the Home Guarantee misses the chance to kill two birds with one stone, and avoid the issue of even short-term price inflation. 

As a project marketer, he is in constant contact with developers, and according to the clients he’s been talking to “the biggest issue at the moment is obviously construction costs are up, but there’s also a massive concern from builders that the retail market is not there,” he said. 

The money that will soon be in buyers’ hands thanks to the LMI savings could have been directed entirely into the new homes market, concentrating demand in the new homes sector rather than spreading it through the existing market.

“The only way we’re going to slow extreme price growth and inflation is by evening out supply and demand, and we cannot do that without more supply.”

Are you interested in building or buying new? Check out our dedicated New Homes section.

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