HGS and First Home Saver Scheme: Tax Advantages for Young Buyers

The Home Guarantee Scheme (HGS) replaced the First Home Loan Deposit Scheme (FHLDS) in January 2024. It’s designed to help first-home buyers access mortgages with small deposits without paying Lender’s Mortgage Insurance (LMI).

Under HGS, eligible first-home buyers can borrow up to 95% LVR without LMI. Normally, a 95% LVR loan triggers $20,000–$30,000 in LMI costs (depending on loan size). HGS eliminates this cost by guaranteeing part of the loan to the lender.

The mechanism: instead of paying LMI to an insurance company, the government (via the scheme) guarantees the lender’s loss if you default. The lender takes on the risk directly, and the government absorbs potential losses. Because the government guarantee is free (no insurance premium for the borrower), HGS effectively eliminates the LMI cost.

Eligibility is tighter than FHLDS. You must be a first-home buyer (never owned property), have a maximum household income (roughly $180,000 single, $360,000 couple, depending on loan size), and purchase a property under a maximum price (varies by state, roughly $700,000–$900,000).

Interest rates under HGS are typically 0.2–0.5% higher than standard loans because lenders see HGS-backed loans as higher-risk. You’re borrowing 95% LVR with a smaller deposit; the margin for error is slim. However, the rate premium is much lower than the LMI cost you’d otherwise pay, making HGS economical.

The benefit is substantial. A $500,000 purchase with a $25,000 deposit (5% down) would normally trigger $15,000–$20,000 in LMI. Under HGS, you pay zero LMI and instead pay a slightly higher rate (0.3%) for 25 years. The total interest cost is higher, but the upfront saving (no $15,000–$20,000 LMI) is immediate.

HGS has caps: in some states, only a limited number of guarantees are issued per year. Once the cap is reached, the scheme closes to new applications until the next financial year. This has caused frustration for buyers waiting too long; as of early 2026, capacity has expanded but remains a consideration.

Property type restrictions exist. HGS typically applies only to new build homes or primary residence purchases in certain circumstances. Investment property buyers are excluded. Some states have more generous HGS rules than others; Victoria and Queensland have been expanding HGS eligibility.

The First Home Saver Account (FHSA) is a complementary tax incentive. It’s a special savings account allowing first-home buyers to contribute up to $8,000 per year (or $16,000 in the first year). Contributions are tax-deductible, meaning if you earn $80,000 and contribute $8,000 to an FHSA, your taxable income drops to $72,000.

FHSA grows tax-free. Any interest or investment earnings within the account are not taxed while the money is in the FHSA. When you withdraw for a first home purchase, the withdrawal is tax-free. This is unique; normally withdrawals from savings attract tax on earned income.

Combined impact: HGS eliminates LMI ($15,000–$20,000), and FHSA provides tax deductions and tax-free growth on savings. A buyer saving $8,000 per year for three years in an FHSA receives a tax benefit of roughly $2,400 (30% of $8,000 × 3 years) and grows the $24,000 contributed to roughly $25,500–$26,000 (with interest). At purchase, they have $26,000 accumulated, no LMI to pay, and tax savings from contributions.

The disadvantage: both HGS and FHSA have income caps and property price caps, locking out higher-income buyers and those targeting premium properties.

Disclaimer: This article provides general information only and should not be taken as financial or legal advice. HGS eligibility, FHSA rules, and first-home buyer incentives change regularly. Consult your tax advisor and mortgage broker before using either scheme.