Bills Digest No. 102   1997-98 Defence Service Homes Amendment Bill 1997

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This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.


Passage History

Defence Service Homes Amendment Bill 1997

Date Introduced: 22 October 1997
House: House of Representatives
Portfolio: Veterans' Affairs
Commencement: On the day on which the Act receives Royal Assent.


The Bill amends the Defence Service Homes Act 1918 to provide for:

protection of the compensatory nature of the Defence Service Homes Loans Scheme (the scheme) through the introduction of a guaranteed minimum subsidy;

simplification of the scheme's current interest rate arrangement; and

the making of a new agreement between the Westpac Banking Corporation and the Commonwealth.


The Defence Service Homes Amendment Act 1918 (the Act), administered by the Department of Veterans' Affairs, provides home loans assistance to Defence Force members and certain other persons.

Prior to 1988 loan assistance was provided to Defence Force members by the Commonwealth through the Defence Service Homes Corporation.

Loans were multi-tiered:(1)

  • First tier ($0-$12000 @ 3.75% pa)
  • Second tier ($12001-$15000 @ 7.25% pa)
  • Third tier ($15001-$25000 @ 10% pa).(2)

The Defence Service Homes Amendment Act 1988 amended the Defence Service Homes Act 1918 to provide for Westpac Banking Corporation to acquire the right to provide future loans under the Defence Service Homes (DSH) Loans Scheme.

The Defence Service Homes Amendment Act 1988 provided for loans under a subsidy scheme funded by Westpac(3), paid to the Bank by the Commonwealth. The subsidy is paid to the Bank on a monthly basis 'reflecting the difference between the concessional interest rates paid by clients on Defence Service Homes loans and an agreed Benchmark rate'.(4) The Benchmark mortgage rate is based on the standard bank interest rate for new owner-occupied housing.(5)

The method of calculation of the subsidy and Benchmark rate are provided for in Schedule 1, section 11 of the Act.

Loans available following the sale to Westpac in 1988, and under current provisions, are:

  • Initial advances (6.85%)
  • Further advances (variable rate according to the rate applied to the last preceding advance)(6)
  • Widow/er advances (3.75%)
  • Advances for essential repairs (10%)
  • Additional advances(7) (variable from 3.75% to 10% depending on the structure and interest rate of a current loan).(8)

The Defence Service Homes Amendment Act 1988 reduced the rate for new borrowers obtaining initial advances to 6.85% pa which was the approximate effective rate over the life of the standard three tiered loans.(9) It linked the interest rate on further advances to the rate of previous advances. The interest rate for essential repairs was set at 10% pa.

In 1996 the Government introduced the first stage of its Veterans' Affairs Budget commitments to interest rate reform on certain new additional advances under the scheme.(10) The Veterans' Affairs Legislation Amendment (1996-97 Budget Measures) Act 1997 introduced a reduction in the interest rate for new additional advances from 10% to 6.85% pa in line with the initial advance rate.

The Minister states that this Bill completes the interest rate reform commitment. All advances will now have an interest rate of 6.85% or less.(11) The Bill provides for a 'guaranteed minimum subsidy' through the application of a reduced Benchmark rate, calculated according to proposed new section 35AA which will ensure 'Defence Service Homes borrowers retain an interest rate advantage of at least 1.5% lower than the Benchmark rate, regardless of future changes in the market interest rates'.(12)

Main Provisions

Schedule 1-Amendment of the Defence Service Homes Act 1918

Items 1 to 6 relate to rates of interest on advances that eligible individuals may seek from the Bank.

Item 1 inserts a requirement that a statement is issued with certificates of entitlement indicating any effect of the guaranteed minimum subsidy (see proposed new section 35AA) on the rate of interest payable on an advance.

Item 2 sets out a new rate of interest (6.85% pa) that must be specified under paragraph 17(3)(d) in relation to additional advances.

Items 3 and 4 insert qualifications to interest rate specifications for further advances to accommodate the monthly variation of the reduced Benchmark rate.

Item 5 provides for new rates of interest applying from 5 January 1998 to be applied to further advances linked to previous advances.

Item 6 reduces the interest rate specified in a certificate of entitlement for an advance for essential repairs from 10% to 6.85% pa.

Item 7 includes key amendments (sections 35AA-35AD) inserting new sections into the Act relating to the application of the reduced Benchmark rate.

Guaranteed minimum subsidy

Proposed new subsection 35AA(1) provides forthe interest rate payable for any month, if in excess of the reduced Benchmark rate, to be reduced for that month to the interest rate level of the reduced Benchmark rate.

Proposed new subsections 35AA(2) and 35AA(3) provide for the reduced Benchmark rate, when applicable, to be calculated in accordance with the agreement between the Commonwealth and the Bank at a rate 1.5% (rounded up or down to two decimal places) below the Benchmark rate and to replace any higher interest rates appearing in current loan documentation.

Interest rate reductions

Proposed new section 35AB provides for interest rates, payable on certain existing advances subject to single interest rate payments that are higher than 6.85%, to be reduced to 6.85% pa. The lower rate negates any higher rate specified in current loan documentation. It also protects the benefits of the guaranteed minimum subsidy provided for in proposed new section 35AA and may, where a reduced Benchmark rate applies, result in a reduced interest rate level of less than 6.85% pa.

Proposed new subsection 35AC(1) provides for the replacement of multi-tiered interest rates with single rates. Using the formula and examples in proposed new subsections 35AC(2) (3) and (4), a blended interest rate from the loan term is calculated to determine the single interest rate payable. Proposed new subsections 35AC(5) and 35AC(6)) provide that the single rate, where applicable, negates any rate specified in current documentation and is subject to the provisions of proposed section 35AA providing for a guaranteed minimum subsidy which may further reduce the interest rate payable. Proposed new subsection 35AC(7) provides that, should the replacement of a single interest rate increase the rate of interest over the term of a loan, the new subsection (35AC(1)) will not apply.

Proposed new section 35AD provides that certain contracts made by purchasers who would not have met the current definition of an 'eligible purchaser' at the time that they took out their loan under the Defence Service Homes Act 1918, are excluded from the new provisions in proposed sections 35AA, 35AB and 35AC.

Item 8 inserts administrative changes. Proposed new subsection 45(3) provides for a three month period in which to amend clause 11 of the agreement between the Bank and the Commonwealth. Proposed new subsection 45(4) provides for changes within the three month period, regardless of the date the changes are made, to have effect from 5 January 1998.

Schedule 2

Item 10 relates to the application of certain amendments. Changes made by Items 1-6 will apply to certificates of entitlement issued on or after 5 January 1998 and changes made by Items 7 and 9 will apply to interest payable on current loans where the interest is calculated for 5 January 1998 or a later date.

Concluding Comments

The objective of the Defence Service Homes Loans Scheme is 'to recognise, and provide financial compensation for, certain defence service through the provision of housing-related benefits'.(13) This bill addresses issues of concern about the impact of fluctuating interest rates on the value of benefits and the complex interest rate arrangements under tiered loans.(14) It may be argued however that the 'protection' of compensatory benefits through the introduction of a 'guaranteed minimum subsidy' goes beyond the mere provision of 'financial compensation'.

The Bill also raises a question of equity. The DSH scheme has its origins as repatriation assistance. It applies only to those who joined the Defence Force on or before 14 May 1985. Since 1991, the Defence Housing Authority has administered another scheme, the Australian Defence Force Home Loan Assistance Scheme (ADFHLAS), available to members of the Defence Force who enlisted before 1985 and had not taken a loan under the DSH scheme, revoking their eligibility by 1991. Persons (with some exceptions) who enlisted after 1985 are eligible to qualify for assistance under ADFHLAS.

Whilst universal access to the DSH scheme for all service personnel was provided for a period between 1972 and 1985, its current restricted access may be viewed as supporting repatriation rather than a general service benefit. If the purpose of the DSH scheme is a repatriation purpose; to provide housing assistance to a particular class of service persons recognising special service; its coverage may not be universal and equitable. The scheme does not provide assistance for non home buyers renting privately by choice, for work related, financial or other reasons. They rely on being eligible for Rent Assistance. Rent Assistance is not repatriation targeted assistance, being general assistance available to persons receiving DSS or DVA income support payments or family payment as a low income family.


  1. Loans funded before 19 December 1988 (multi-tiered) are known as 'specified portfolio assets'. See Explanatory Memorandum, 'Veterans' Affairs Legislation Amendment (1996-97 Budget Measures) Bill 1996': 34.
  2. Figures taken from Hon B. Scott MP, Minister for Veterans' Affairs. 'War Service Home Loans: Interest', Answer to Question on Notice, House of Representatives, 20 October 1997.
  3. Loans funded on or after 19 December 1988 by Westpac Bank (usually single tiered) are known as 'subsidised advances'. See Explanatory Memorandum, 'Veterans' Affairs Legislation Amendment (1996-97 Budget Measures) Bill 1996': 34.
  4. Explanatory Memorandum, Defence Service Homes Amendment Bill 1988: 2.
  5. 1996-97 Budget Paper No. 1. Budget Statements 1996-97, AGPS, Canberra, 1996: 3-127.
  6. 'Further advance' refers to a subsidised advance (other than widow/er advances or advances for essential repairs) for certain borrowers who are not currently, but have been in the past, borrowers under the scheme. See subsection 4(1) of the Act.
  7. 'Additional advance' refers to a subsidised advance for certain purposes (other than widow/er advances or advances for essential repairs). See subsection 4(1) of the Act.
  8. Figures taken from Hon B. Scott MP, Minister for Veterans' Affairs. 'War Service Home Loans: Interest', Answer to Question on Notice, House of Representatives, 20 October 1997.
  9. ibid.
  10. Portfolio Budget Statements 1996-97. Department of Veterans' Affairs (Defence Portfolio). Budget Related Paper No. 1.3B, AGPS, Canberra, 1996: 30.
  11. Hon B. Scott MP, Minister for Veterans' Affairs. 'Defence Service Homes Amendment Bill 1997', Second Reading Speech, House of Representatives, 22 October 1997.
  12. ibid.
  13. Annual Reports of the Repatriation Commission, the Department of Veterans' Affairs and the National Treatment Monitoring Committee 1996-97, AGPS, Canberra, 1997: 55.
  14. See Mr L. Ferguson MP. 'Defence Service Homes Amendment Bill 1997', Second Reading Speech, House of Representatives, 29 October 1997.

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14 November 1997
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