A newly-announced government scheme, which was promised during the federal election, will allow a select number of first home buyers to purchase a property with a deposit of as little as 5 per cent.

The scheme, which will start from 1 January 2020, will support up to 10,000 loans each financial year and is expected to cut the time taken to save for a deposit for by at least half.

The new deposit scheme, designed to incentivise low-and middle-income earners, will be limited to properties sold for less than $700,000 in Sydney and $600,000 in Melbourne.

First home buyers who apply for the scheme in Queensland will be able to purchase properties in Brisbane and the Gold Coast up to $475,000 in value.

The program will be open to singles with a taxable income of up to $125,000 per year and couples earning less than $200,000 per year, and will apply to owner-occupier loans on a principal and interest basis.

First home buyers property price caps

The scheme comes at a time of declining construction levels for new housing which has an impact on jobs, housing affordability and supply.

After three consecutive interest rate cuts, reducing mortgage rates to a record low, buyers are now returning to the market.

Treasurer John Frydenberg along with housing minister Michael Sukkar released the government's draft investment mandate for the First Home Loan Deposit Scheme.

“These incentives have helped thousands of first home buyers enter the market,” Sukkar said.

“In the past year, around 110,000 Australians bought their first home—the highest level since 2009.”

The program will only apply to owner-occupied principal-and-interest loans and only 5,000 guarantees will be available to the big banks.

The price caps will also apply to large regional centres with a population in excess of 250,000, namely the Gold Coast, Newcastle and Lake Macquarie, the Sunshine Coast, Wollongong and Geelong.

The Property Council supported the announcement that would assist first home buyers bridge the deposit gap which continues to be a significant hurdle to home ownership.

“Getting these settings right, including keeping the focus on new housing construction, will be vital in ensuring the scheme is a winner for first home buyers and the housing sector more generally,” Property Council chief executive Ken Morrison said.

“While there is some more detail to be determined before eligible borrowers can actually apply, the information now available should help them to start making plans.”

Recent housing finance data out from the Australian Bureau of Statistics shows that 28.5 per cent of commitments in May were first-home buyers, up from 20.4 per cent two years ago.