First Home Guarantee Scheme – 5% Deposit: The Hidden Cost You Must Know

The new government scheme sounds like a dream come true for first-home buyers. But before you jump in, you need to be aware of a costly trap set by some major banks.

The Shockingly High Interest Rate Trap

“It is a concern that an outcome of the expansion will be price increases greater than what people would have paid in LMI.”
— Andrew Hall, CEO, Insurance Council of Australia ​

Instead of passing on the savings, some major lenders are charging outrageously high interest rates on these government-backed loans.

• Which banks are doing this? Reports confirm ANZ and NAB are charging interest rates up to ~2.5% higher on these 5% deposit loans compared to their standard mortgages.
• What does this cost you?
• Loan Amount: $1 million
• Standard Rate (e.g., 4.25%) Monthly Repayment: ~$4,919
• Inflated Rate (e.g., 6.75%) Monthly Repayment: ~$5,956
• Extra Cost Per Month: $1,037
• Extra Cost Over 30 Years: A staggering $373,000
• But... why? Banks claim these loans are riskier. However, financial experts point out that with the government guaranteeing the risk, this argument doesn't hold up.

The "Generational Debt Trap"

This isn't just a higher repayment; it's a long-term financial burden.

• The Long-term Impact: An extra $373k in interest can trap a buyer in a cycle of debt, making it harder to save, invest, or prepare for retirement.
• The Scary Stat: For some buyers taking these inflated loans, the total interest paid could add more than 35% to the original loan amount.

Why This Matters So Much Right Now

This "rate trap" is especially painful when combined with current financial pressures.

Today's Financial Pressures

Why the 'Rate Trap' Hurts Even More

Rising interest rates

The higher starting point means any extra percentage from the banks costs you even more.

Mortgage stress is high

Over 1 million Australians are already feeling the squeeze, and this adds fuel to the fire.

Job cuts at major banks

Less competition between lenders could allow these unfair rates to stick around for longer.

Your 5-Step Plan to Avoid the Trap

You can still use the scheme to your advantage, but you must be strategic. Here are your practical next steps:

1. Shop Around Relentlessly
   Don't just walk into your everyday bank. Use a comparison site or a broker to compare rates from all lenders, including the other major banks (Westpac, CBA) and credit unions.
2. Check the Fine Print
   Ask the lender to show you in the contract exactly how the government guarantee is applied and confirm there are no hidden fees designed to replace LMI.
3. Use an Independent Mortgage Broker
   A good broker is your best defence. They work for you, not the banks, and can find deals that aren't advertised to the public, ensuring you get a fair rate.
4. Model Your Financial Future
   Use a mortgage calculator to see the 30-year impact of different interest rates. Understanding the long-term cost is crucial to avoiding a debt trap.
5. Get Professional Property Advice
   A reputable real estate agent, like the team at Forge, can help you find a property that truly fits your budget, reducing the risk of over-extending yourself with a high-rate loan.

The Bottom Line

The 5% Deposit Scheme is a fantastic opportunity, but only if you get a fair interest rate. By doing your research, asking the tough questions, and working with independent experts, you can navigate around the banks' trap and secure your first home without falling into a lifetime of unnecessary debt.

Contact Us

Ready to secure a fair home loan and avoid the rate trap?

Forge Real Estate can help you compare participating lenders under the First Home Guarantee, model the true long‑term costs, and find a property that fits your budget. Please contact us to find out more.

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Your first home should set you up for success—let’s make sure it does.