Changes to Australia's first home buyer scheme took effect today, allowing buyers to purchase properties with just a 5% deposit. This update aims to help first-time buyers avoid costly lenders mortgage insurance (LMI). The scheme, now known as the Australian Government 5% Deposit Scheme, has also lifted price caps on eligible properties and removed limits on the number of participants.

The Home Guarantee Scheme enables first home buyers to secure a property with a minimal deposit. Eligible buyers can bypass LMI, as the government guarantees 15% of the loan. However, experts caution that an influx of first home buyers utilizing this scheme may contribute to rising home prices, which have increased for eight consecutive months.

Previously, the scheme had income restrictions, allowing only singles earning less than $125,000 and couples with a combined income below $200,000 to participate. These income caps have now been eliminated. Additionally, there was a limit on the number of participants, which has also been removed. To qualify, applicants must be Australian citizens, at least 18 years old, and purchasing their first home to live in.

The new property price caps have significantly increased in major cities. In Sydney, the cap has risen to $1.5 million, while in Brisbane and Canberra, it is now set at $1 million. In contrast, Hobart's cap has only increased by $100,000, and Darwin's remains unchanged. The adjustments are expected to nearly double the number of affordable homes available to first-time buyers. According to recent data, the new limits are below the median house values in every capital city, although median unit values fall under the new caps.

For first home buyers, a 5% deposit is required. For instance, a $1.5 million home in Sydney would necessitate a $75,000 deposit, while a $950,000 home in Melbourne would require $47,500. Although participants in the scheme can avoid LMI, they must still consider other costs, such as stamp duty, building and pest inspections, and legal fees.

The primary advantage of the scheme is the ability to purchase a home with a smaller deposit while avoiding LMI. For example, someone buying a $1 million home with a 5% deposit could save nearly $34,000 in upfront premiums. However, buyers should be aware of the risks associated with negative equity if property values decline. Additionally, a smaller deposit and larger loan amount can lead to higher interest payments over time.

The expanded scheme may increase competition in the housing market, potentially driving up property prices. Government projections suggest a modest 0.5% increase in property values over six years, but some analysts believe the impact could be more significant. The Insurance Council of Australia has predicted a potential 10% increase in values within the first year.

To apply for the scheme, interested buyers should first verify their eligibility. If eligible, they can reach out to a participating lender, who will submit their application to Housing Australia.