In short, yes you can buy your first home with a 5% deposit, but as with so many things, there are qualifying criteria you must meet to be able to buy a house with a 5% deposit.
For eligible home buyers, the Australian Government 5% Deposit Scheme can make it possible to purchase a home with a deposit of as little as 5% without paying Lenders Mortgage Insurance (LMI) or if you don’t qualify then you have the option of paying the LMI or even look at having your parents help with a security guarantee to avoid this extra cost.
But having a 5% deposit doesn’t automatically mean you’ll qualify for a home loan. Your income, expenses, existing debts, credit history and the property you’re buying all play a part.
Here’s how it works.
How does a 5% deposit home loan work?
Let’s say you’re buying a home for $700,000.
A 5% deposit would be:
$700,000 × 5% = $35,000
This could mean borrowing the remaining $665,000, subject to lender approval and any other purchase costs you need to cover.
Normally, borrowing more than 80% of a property’s value can mean paying Lenders Mortgage Insurance. Depending on the loan amount, LMI can cost thousands or even tens of thousands of dollars.
However, eligible buyers purchasing through the Australian Government 5% Deposit Scheme may be able to avoid this cost.
What is the Australian Government 5% Deposit Scheme?
Under the scheme, eligible home buyers can purchase a property with a deposit from 5%, with the Australian Government providing a guarantee to a participating lender.
This means you may be able to borrow up to 95% of the property’s value without paying LMI.
Importantly, the government isn’t contributing money towards your property or paying part of your loan. You are still responsible for the full home loan.
The guarantee simply helps eligible buyers access a home loan with a smaller deposit without the usual LMI cost.
Do I need more than 5% saved?
Potentially, yes.
Your deposit isn’t necessarily the only money you’ll need when buying a home. Depending on your circumstances and where you’re buying, you may also need to budget for things such as:
- Stamp duty, if applicable
- Conveyancing or legal fees
- Building and pest inspections
- Loan or bank fees
- Transfer and registration costs
- Moving expenses
- A financial buffer after settlement
First home buyers may also qualify for stamp duty concessions or exemptions, which can significantly reduce the upfront costs of purchasing.
For example, in Victoria, eligible first home buyers may receive a stamp duty exemption or concession depending on the purchase price and eligibility requirements.
This is why it’s worth working out your total funds required, rather than simply aiming to save exactly 5% of the purchase price.
Can everyone get a home loan with a 5% deposit?
No. A 5% deposit doesn’t override the lender’s normal lending criteria.
The bank will still assess whether you can comfortably afford the loan.
They’ll generally look at your:
Income: How much you earn and how stable your employment or income is.
Living expenses: Your regular household and personal expenses.
Existing debts: Car loans, personal loans, HECS/HELP debts, credit cards and other financial commitments can affect how much you can borrow.
Credit history: Your repayment history and overall credit profile can influence your application.
Property: The lender will also need to be comfortable with the property you’re purchasing and its valuation.
You could have the required 5% deposit but still find that your borrowing capacity isn’t enough for the property you want to buy.
That’s why working out your borrowing capacity early can be just as important as saving your deposit.
What if I don’t qualify for the 5% Deposit Scheme?
There may still be options.
Some lenders offer home loans at 90% or even 95% of a property’s value outside the government scheme. However, LMI may apply and lending criteria can vary significantly between lenders.
There may also be other options depending on your circumstances, including family guarantees or profession-based LMI waivers.
This is where comparing different lenders and loan structures can make a big difference.
Should I buy with a 5% deposit or keep saving?
There’s no one answer that suits everyone.
Buying sooner with a smaller deposit could allow you to enter the property market earlier, but it also means taking on a larger home loan and potentially paying more interest over time.
Saving a larger deposit could reduce your loan amount and repayments, but it may mean delaying your purchase while property prices and your personal circumstances continue to change.
The right option depends on your income, savings, borrowing capacity, property budget and how comfortable you are with the repayments.
Could a parent security guarantee help?
Another option for buyers who don’t have a large deposit is a parent security guarantee, sometimes called a family guarantee or guarantor home loan.
With this type of loan, a parent can use some of the equity in their own property as additional security for your home loan.
This can potentially allow you to buy with a smaller deposit as well as avoid Lenders Mortgage Insurance (LMI).
How does it work?
Rather than your parents giving you the money for the deposit, the lender takes a limited guarantee over part of the equity in their property.
For example, if you’re purchasing a home for $700,000, and a parent may be able to provide additional property security to cover some of that gap. The guarantee can generally be limited to a specific amount rather than your parents guaranteeing their entire home loan.
Once you’ve built enough equity in your property through repayments, an increase in the property’s value, or ideally both, you may be able to apply to have your parents’ property released from the guarantee, subject to the lender’s requirements at the time.
What are the risks for parents?
Providing a guarantee is a significant financial commitment.
If you were unable to repay the home loan and the sale of your property wasn’t enough to repay the debt, the lender could potentially seek repayment from the guarantor up to the amount covered by their guarantee.
Parents considering becoming guarantors should fully understand the risks and lenders may require or recommend that they obtain independent legal advice before proceeding.
A parent security guarantee isn’t right for every family, but for some buyers it can be another way to enter the property market sooner without waiting years to save a larger deposit.
What about the Help to Buy scheme?
Another option that may help eligible buyers get into the property market with a smaller deposit is the Australian Government’s Help to Buy scheme.
Help to Buy is a shared equity scheme, which means the government contributes towards the purchase price of your home in exchange for a share in the property’s equity.
Eligible buyers may be able to purchase a home with a deposit of as little as 2%, with the government contributing up to:
- 30% of the purchase price of an existing home, or
- 40% of the purchase price of a new home.
This can significantly reduce the amount you need to borrow from a lender.
What could that look like?
Let’s say you’re buying an existing home for $700,000.
With a 2% deposit, you would contribute $14,000.
If you were eligible for the maximum 30% government contribution, Help to Buy could contribute up to $210,000 towards the purchase.
This could reduce the amount you need to borrow from the bank to around $476,000, before allowing for any other costs or adjustments.
That can make a substantial difference to both your borrowing requirements and your monthly home loan repayments.
Is Help to Buy the same as the 5% Deposit Scheme?
No. They’re quite different.
With the Australian Government 5% Deposit Scheme, the government provides a guarantee to the lender, but it doesn’t own a share of your property. You still borrow the funds required to purchase the property and retain ownership of the home.
With Help to Buy, the government actually contributes money towards your purchase and receives a corresponding equity share in the property.
Over time, you may be able to buy back some or all of the government’s share, subject to the scheme’s rules.
Who can qualify?
Help to Buy has eligibility requirements, including income limits and property price caps, and you’ll also need to meet the participating lender’s lending requirements.
There are also rules around property ownership and how the home is used.
So, while the ability to buy with a 2% deposit sounds attractive, it’s important to check whether you qualify and understand how shared equity will affect you in the future.
So, which low-deposit option is right for you?
If you don’t have a 20% deposit saved, it doesn’t necessarily mean buying a home is out of reach.
Depending on your circumstances, your options could include:
- Buying with a 5% deposit through the Australian Government 5% Deposit Scheme
- Using a parent security guarantee
- Applying for the Help to Buy shared equity scheme with a deposit from 2%
- Taking out a higher LVR home loan and paying LMI
- Using an eligible professional LMI waiver, where available
Each option works differently and has its own eligibility requirements, benefits and considerations.
Before deciding you need to spend another few years saving, it’s worth finding out which options are actually available to you.
At The Lending Society, we can look at your income, savings, borrowing capacity and property goals and help you understand which pathway could work for you.
Want to know what you could buy with the savings you have now?
Get in touch with and we can run through the numbers with you and give you a clearer idea of your options before you start house hunting.
The information in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Eligibility criteria, lending policies and government scheme requirements apply and may change.