Rental costs shine a new light on the First Home Guarantee

Higher rental costs are reshaping the value proposition of the First Home Guarantee, with new analysis from Cotality comparing the additional cost of time in the rental market and potential LMI costs, with the additional interest cost of a 5% deposit home loan. While the scheme comes with higher interest costs, the savings on rent - particularly in cities like Sydney and Brisbane - may outweigh the long-term loan burden.

Since its inception, federal home guarantee schemes have helped over 168,000 eligible home buyers into home ownership. Under the First Home Guarantee, eligible buyers can purchase a home with just a 5% deposit, while the government guarantees the gap to a standard 20% deposit - helping them avoid lenders mortgage insurance, which is typically in the tens-of-thousands of dollars.

However, since the scheme’s introduction as the ‘First Home Loan Deposit Scheme’ in January 2020, rising rent costs have put the scheme in a new light. Since January 2020, the median weekly rent across Australian dwellings has increased an estimated $200 per week, to $669. That’s an uplift of over $10,000 per year.

The real cost of a 5% deposit

First home guarantee schemes come at a cost, both to individuals who take them up, and the broader housing system. The main cost for individuals is extra interest paid over the life of a loan. The flipside of a 5% deposit on a home purchase is a 95% loan to value ratio on the home loan. Taking out the extra debt means paying extra interest compared to the traditional 20% deposit (Figure 1 shows an illustrative example based on the median dwelling value in Australia).

Figure 1. Total home loan repayment on the median Australian dwelling value ($848,858): 5% with no LMI vs 20% deposit

_{Mortgage assumptions: a 30-year principal and interest loan term paid monthly, with long-run interestrate assumption of 5.5% per annum over the life of the loan. The mortgage rateis based on the current, new owner-occupier average, adjusted for the August rate cut and is subject to change.}

Over the life of a 30 year loan, the extra interest costs can be tens-of-thousands, or hundreds-of-thousands more expensive than a 20% deposit home loan.

Even though a smaller deposit means paying more interest over time, it could still work out cheaper for renters. Getting into a home sooner may mean spending less time paying rent, and those savings can add up. The biggest savings across the capital cities are estimated to be in Sydney, where a 5% deposit reduces time to save a deposit by an estimated six years, and $251,000 on rent at $801 per week.

Figure 2 compares the additional interest cost of a 5% loan with potential LMI and rental savings. In this scenario, purchasing at the top of the scheme works out better than spending extra time in the rental market to save up a 20% deposit. In fact, the rental savings far outweigh the savings on LMI.

The analysis has a lot of assumptions (detailed below) and should be taken as more illustrative than advice as to whether the scheme works for all individuals. For example, someone who does not have rental costs might find it more beneficial to save up a full 20% deposit, saving on both LMI and extra interest costs. But there are other considerations to take into account even for non-renters, such as entering the market sooner to get ahead of further potential market upswings.

Figure 2. Do the numbers stack up on a 5% deposit?

_{Purchase value is based on the limit of price caps in each city.}

_{Mortgage assumptions: a 30-year principal and interest loan term paid monthly, with long-run interest rate assumption of 5.5% per annum over the life of the loan. The 5.5% figure is based on the latest new owner-occupier rate reported by the RBA, adjusted for the August rate cut, and is subject to change.}

_{Note on LMI calculations: based on Lendi LMI Calculator (accessed 2nd September 2025). Whilst every effort has been made to ensure the accuracy of this calculator, the results should be used as indication only. They are neither a quote nor a pre-qualification for a loan. Lendi’s LMI Calculator can be accessed here: https://www.lendi.com.au/calculators/lmi-calculator/}

_{Potential savings on the rental market: Assumes the difference in the time to save a 5% and 20% deposit, multiplied by current median rental rates. Time to save a deposit assumes a 15% savings rate.}

_{It's important to note this analysis represents the maximum purchase price and the minimum deposit. Individuals considering the scheme will have a different cost-benefit scenario depending on their purchase price and deposit size and should take into account their own individual circumstances.}

A bigger scheme, a bigger boost to demand

When the First Home Guarantee was introduced, we pointed out that the income thresholds for accessing the scheme were relatively high, giving an additional boost to fairly high income earners who may have saved up their 20% deposit in time. But targeting the scheme specifically to lower income households may also have been a challenge to its take-up, because even if lower income households had their deposit, they may not have qualified for a home loan.

With expansion of the schemes places, price caps and incomes, there will almost certainly be a short-term boost to home values up to the threshold of the scheme, coinciding with interest rate falls and tight levels of housing supply.  While individuals on the scheme could leap over the deposit hurdle faster, this policy is ultimately a demand side stimulus which fails to address why deposits – and now rents - are so unaffordable in the first place.