Recently Minister for Housing Claire O’Neil announced plans to remove the requirement that first home buyers (FHBs) purchase lenders mortgage insurance (LMI) as part of purchasing their first property.

Under the current rules which were introduced in 2000, FHBs with deposits of less than 20 per cent were required to purchase LMI to provide more security for lenders and allow lenders to enter the market sooner with a lower deposit. When the federal government made this policy in theory, it wasn’t a bad plan. However it did add to the costs of those seeking to buy a home.

Why removing LMI will lower rents and home prices

Come into effect from 1 October, removing the need for FHBs to purchase LMI will ultimately lower rents and house prices, despite a likely short-term increase. 

In 2025, the cost is around $25,000 for an FHB. This meant fewer new households could buy a home, as their deposit was insufficient, requiring them to save for longer to pay this additional cost. This meant that more households were renting, and renting for longer, In turn, this forces up rental prices, making it even harder to save to buy a home.

The secondary impact of LMI is to further reduce the supply of new homes. Over the medium to long term, around a third of all new homes are built by FHBs. By reducing FHBs’ ability to gain a loan, it reduces the number of new homes commencing construction. With the supply of new homes impaired, and demand growing through population growth, home prices rise faster than they otherwise would, making it increasingly difficult for FHBs to save a deposit.

So the higher rental costs and reduced supply begin to have a compounding impact on FHBs and make it increasingly difficult for them to enter the housing market.

Over time, these three effects from LMI costs on FHBs have made the housing shortage worse. It has lowered the home ownership rate and at the same time, increased returns to investors.

What about the short term?

In the short term, this announcement will see home prices rise. Removing the requirement for LMI provides FHBs with an extra $25,000 in their deposit and will see more FHBs active in the market from 1 October 2025. At the same time, the supply of homes is fixed. It takes at least six months to build a new home. Therefore, a rise in demand, while supply is fixed, will see home prices rise.

Furthermore, FHBs are not evenly distributed across the market. They are not looking to buy in affluent suburbs with minimal or no impact on the higher end of the market. But they often purchase in the same suburbs or types of homes as other FHBs. So the upward pressure on home prices for FHBs will be tangible – in those markets and locations where FHBs are active. At least in the short term.

How long will change take to make an impact?

So how long does it take for this short-term uplift in prices to be offset by the increase in supply that will lower those prices?

Treasury’s estimate is that this will take six years. HIA's estimate is that it will be a little more than three years. This is due to differing assumptions. HIA contends that because the change in policy is permanent, it does not have the same ‘draw forward’ impact of HomeBuilder or other short-term stimulus policies that would see new households’ form. Short-term stimulus measures typically see the ‘Bank of Mum and Dad’ step into the market to access once-in-a-generation grant funding.

The removal of the LMI requirement, however, is a permanent change that will see a more orderly return to market by FHBs mostly responding to lower interest rates. Also, by moving the policy announcement forward three months, there is insufficient time for FHBs to make a significant change to the timing of their home purchase decision.

The consequence of this difference in assumptions is that HIA estimates the short-term appreciation of home prices in FHB markets will be relatively small. These same markets are the ones that will see the fastest increase in supply, largely through detached homes in greenfields suburbs. Impediments to apartment construction at present will see a quicker response from detached supply.

Regardless of these assumptions, this is about time. More new home construction, fewer households renting and increased home ownership will all occur because of this policy announcement – eventually. It’s also a decision that sees government taking a view on housing policy that extends beyond the next election, and for this, they should be commended.

For more housing industry insights, visit the HIA Economics hub.

First published on 1 October 2025