First Home Guarantee Expansion: What You Need to Know Before Applying

The Australian Government has significantly expanded the First Home Guarantee scheme as of October 1st, 2025, making it easier than ever for first-time buyers to enter the property market. But before you rush to apply, there are some critical factors you need to understand.

What's Changed?

The expanded scheme now offers:

·         No income restrictions - all first-home buyers are eligible regardless of earnings

·         Unlimited places - no cap on participant numbers

·         Higher property price caps - up to $1.5 million in Sydney, $950,000 in Melbourne, $1 million in Brisbane

·         5% deposit entry - with no Lenders Mortgage Insurance (LMI) required

This means eligible buyers can purchase a home with just a 5% deposit while the government guarantees the loan, eliminating LMI costs that can run into tens of thousands of dollars.

The Hidden Risk Nobody's Talking About

Here's something crucial that many people overlook: a rejected loan application can seriously damage your credit score, making it even harder to get approved next time.

Before you apply, you need to understand that meeting the scheme's eligibility criteria doesn't automatically mean you'll get loan approval. As the government's own website states, you must still meet your lender's credit policy and loan approval criteria.

Three Essential Steps Before Applying

If you're considering using this scheme, take these preparatory steps seriously - ideally giving yourself at least three months to get everything in order:

1. Check and Improve Your Credit Score

Obtain your credit report and score from Illion, Equifax, or Experian (you can access free reports four times per year). Your score should be at least "average," but "good" or higher significantly improves your chances. If there are errors on your report, contact the provider and credit bureau to have them corrected.

2. Reduce Your Credit Card Limits

Many people don't realize that credit card limits can dramatically reduce your borrowing capacity - even if the cards are unused or paid off in full each month. The concern is that you could max out these cards after your loan is approved.

As a general rule, your total credit card limits can reduce your potential home loan by approximately seven times that amount. A $10,000 card limit could cost you $70,000 in borrowing power. Consider reducing or canceling unnecessary cards before applying.

3. Clean Up Your Spending Habits

Lenders will forensically examine your last three months of transactions to assess whether you can afford mortgage repayments. They'll also stress-test your finances by calculating repayments at rates 3% higher than current levels.

For at least three months before applying, minimize discretionary spending including:

·         Streaming services and subscriptions

·         Ride-share services

·         Regular dining out and entertainment

·         Non-essential beauty treatments or luxury purchases

Remember, lenders compare your actual spending against a household expenditure measure (HEM), using whichever is higher. So while you should reduce discretionary expenses, don't cut so deep that your spending looks unrealistically low.

Understanding Your Realistic Borrowing Capacity

The headlines about $1.5 million property caps can be misleading. Recent modeling shows that even a couple earning the average NSW salary of $106,000 could only borrow around $1.12 million through the scheme, or $560,000 individually.

Why? Because the scheme doesn't change banks' lending criteria - and it shouldn't. Lenders will only approve what you can realistically afford to repay.

For example, a 5% deposit on an $800,000 property means monthly repayments of approximately $4,400 over 30 years at current rates. That's a significant commitment for anyone on a low to middle income.

Important Restrictions to Consider

Industry experts point out several limitations you should understand:

The property must remain your primary residence while the guarantee is active. You cannot convert it to an investment property and rent it out during this period without potentially having to pay LMI or other additional costs.

Additionally, if you want to refinance while staying on the scheme, you're restricted to other approved lenders, which can limit your options.

Is the Scheme Right for You?

Another broker has said that the scheme should be treated as a leg-up, not a shortcut. (Note: This quote is from an industry expert, not Phil's personal advice). Buyers should stress-test their budget, factor in all ongoing costs, and ensure they're financially comfortable - not just stretching to meet the minimum deposit.

The first home should be affordable and practical, possibly requiring buyers to adjust expectations toward outer-metro growth areas or regional centers rather than inner-city suburbs. (Again, this is an external expert's view, not Phil's direct advice).

Beyond the Deposit

Remember, buying a home involves more than just the deposit. You'll also need to budget for:

·         Stamp duty

·         Building and pest inspections

·         Conveyancing fees

·         Ongoing council rates

·         Strata fees (for apartments)

·         Regular maintenance and repairs

The Bottom Line

The expanded First Home Guarantee can be an excellent opportunity for well-prepared buyers. However, rushing in without proper preparation could result in loan rejection and credit score damage that makes future applications even harder.

Take the time to prepare properly, understand your true borrowing capacity, and ensure you're buying something you can comfortably afford - not just something you can technically qualify for.

If you're considering applying for the First Home Guarantee, I'd be happy to discuss your specific situation and help you prepare a strong application. Contact me to arrange a consultation where we can review your finances and develop a strategy that maximizes your chances of approval.

This blog provides general information only and should not be considered personal financial advice. Please consult with a qualified mortgage broker or financial advisor about your specific circumstances.