What You Need to Know
From 1 October 2025, first home buyers will be able to purchase a property with as little as a 5% deposit, without paying Lenders Mortgage Insurance (LMI). The government’s expansion of the Home Guarantee Scheme removes income caps, lifts property price limits, and makes places unlimited.
Here we breakdown how it works, the pros and cons, and what it could mean for your financial future.
How the Scheme Works
Traditionally, lenders require buyers to contribute at least 20% of the property’s value to avoid LMI. Under this new scheme:
- ·Buyers can enter the market earlier with a 5% deposit.
- ·The government guarantees 15% of the loan, removing the need for LMI.
- ·Income caps to be eligible are scrapped.
- ·Property price caps are lifted, reflecting today’s market. In Sydney, the cap rises to $1.5 million, Melbourne to $950,000, and Brisbane to $1 million.
- ·All eligible first home buyers can access the scheme,no lottery-style limits.
The Benefits of the 5% Deposit Scheme.
1. Get into the market sooner
Saving for a 20% deposit can take years, especially as house prices rise faster than wages. With just a 5% deposit, buyers can cut their saving time dramatically and avoid paying rent while trying to catch up.
2. Save thousands in LMI
LMI often adds tens of thousands of dollars to the cost of buying a home. Under this scheme, that cost is eliminated. On a $1 million home, avoiding LMI could save around $40,000.
3. Better access in expensive markets
For years, price caps under previous schemes shut out buyers in Sydney and Melbourne. The new higher limits mean first home buyers can now consider properties in suburbs that were previously out of reach.
4. Greater inclusivity
No income caps or participant limits mean more Australians can apply. Dual-income couples, regional buyers, and those previously excluded can now take advantage of the scheme.
5. Support from lenders
Housing Australia has indicated that smaller and regional banks will also participate, giving buyers more choice and potentially better deals.
The Downsides: What to Watch Out For
1. Higher debt levels
Buying with a 5% deposit means taking on a 95% loan-to-value ratio (LVR). With such thin equity, buyers are more vulnerable if property prices fall or interest rates rise.
2. “Lifetime of debt” concerns
Critics argue that while the scheme helps buyers into the market, it may saddle them with decades of repayments. With mortgage terms stretching 30 years or more, even small interest rate rises could put household budgets under stress.
3. Risk of pushing prices up
Economists and property experts warn the scheme could fuel extra demand, driving house prices even higher. Some forecasts suggest rises of 3.5% to 9.9%, much higher than the government’s estimate of just 0.5% over six years.
4. Not always smooth sailing with lenders
Some borrowers may face tougher approval processes or slightly higher interest rates. Banks may look more closely at buyers with small deposits as lenders want to see genuine savings and strong repayment capacity.
5. Doesn’t solve housing supply issues
The scheme boosts demand but doesn’t address the shortage of new housing. Without more supply, affordability challenges are likely to remain in the long term.
Example: The 5% vs 20% Buyer
Emma wants to buy an $800,000 home:
- ·20% deposit = $160,000.At $2,500 a month saved, it would take her over five years to reach her target.
- ·5% deposit = $40,000.She could achieve this in just 16 months (just over a year).
The scheme lets Emma buy much sooner, potentially avoiding further price increases.
But here’s the trade-off:
- ·With a 5% deposit, Emma’s loan would be $760,000, with repayments around $4,557 a month.
- ·With a 20% deposit, her loan would be $640,000, with repayments around $3,837 a month.
That’s $720 more every month, plus over $139,000 more in interest across the life of the loan.
In other words, Emma can get into the market faster with a 5% deposit, but she pays the price in higher repayments and less financial flexibility.
What This Means for First Home Buyers
The scheme does reduces upfront costs, cuts saving time, and levels the playing field for buyers in expensive cities.
But it also carries risks: higher leverage, potential price inflation, and greater long-term debt exposure. Buyers must consider not just whether they can buy a home, but whether they can sustain the repayments over decades, through interest rate rises and life changes.
The 5% First Home Buyer Deposit Scheme for some may be the break they need to finally secure their first property. For others, the risks of higher repayments and higher debt may outweigh the benefits.
At Cashflow Financial, we recommend approaching the scheme with careful planning and clear strategy. Understand your borrowing power, stress-test your repayments, and weigh up whether buying sooner is better than saving a bigger deposit. Need advice? Contact us, we are there to help.