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Some 560 families impacted by the collapse of builder Porter Davis will be able to get their deposits back.
The Victorian government bail-out applies to customers who paid deposits before the builder went into liquidation last month but were left without insurance coverage.
Premier Daniel Andrews said he believed the scheme would cost about $15 million, with insurance capped at a five per cent deposit and averaging about $25,000 per customer.
"They didn't do anything wrong. They have acted in good faith," Mr Andrews told reporters on Thursday.
"Porter Davis for some inexplicable reason have not forwarded on the insurance premiums that have been paid.
"So those people will get, just like any other insured person, they will get that five per cent deposit back."
About 1700 homes across Victoria and Queensland were left in limbo when Porter Davis went into liquidation last month.
The Victorian Building Authority is investigating whether Porter Davis has breached any laws after customers claimed they were left without domestic building insurance despite paying their deposits.
Porter Davis customer Richard Williams told AAP he was relieved by the announcement.
"The messages in the group's WhatsApp chats show tears of joy and relief, with people hugging their families," Mr Williams said.
"We will be able to sleep tonight for the first time in three weeks."
The state government is working with liquidator Grant Thornton to understand exactly how many customers without insurance had already started building.
Mr Andrews signalled those customers would also be eligible for support in the future and it would make sense if incomplete projects could be sold on to other builders.
"We just need a little bit more time to firm that up, to have a better sense (of how many are impacted)," he said.
On Wednesday it was revealed the company collapsed owing close to $33 million to the Commonwealth Bank on top of other debts.
The liquidator is still trying to determine Porter Davis's overall financial position.
