Buying a home with 5% deposit

The Big Wins

Borrowers Save Tens of Thousands in Lenders Mortgage Insurance (LMI)

This is the single biggest advantage. Normally, if you have less than a 20% deposit, applicants must pay LMI. This is an insurance policy that protects the lender, not you, and the premium can be significant.

For example, imagine you’re buying a $750,000 property. A 20% deposit would normally require a $150,000 deposit. If you don’t have this much to contribute as a deposit, the LMI cost could easily be over $30,000. That’s a huge sum of money added on top of your loan, or to be paid upfront.

With the revised scheme, the government “guarantees” 15% of your loan for the bank. Your LMI cost becomes $0. You save that $30,000 instantly, making your entry into the market much easier and dramatically more affordable.

First Home Buyers Get Into the Property Market Years Sooner

The hard reality is saving that extra 15% can take years. In that time, property prices can rise significantly, often by more than the amount you’ve managed to save.

Let’s say you need to save an extra $112,500 to reach a 20% deposit on that $750,000 home. If you are able to save $2,000 a month, that will take nearly five years, not accounting for any unexpected expenses along the way. In that time, the price of the property you want could have jumped by over $100,000, putting you back at square one.

With the government now carrying a lot of the financial responsibility, the revised scheme lets you get on the property ladder now and start building your own wealth, setting you up for financial security down the road.

Turn Rent Money Into Equity

Renting can be an effective way to live where you want while you build wealth, but without your own assets it can be counterproductive. With the government scheme enabling first home buyers to buy sooner, those rent cheques can start going towards paying off your own asset instead.

If your rent is $600 per week, you’re spending over $31,000 a year on someone else’s asset. The scheme allows you to redirect that money into an investment that is yours. Even better, as the property market grows over time, so does your wealth. You stop paying someone else’s mortgage and start building your own future.

Building equity in your own assets also opens up further opportunities to grow your wealth.

Trade-Offs to Consider

Bigger Mortgage, Bigger Repayments

This is the unavoidable trade-off. A smaller deposit means a larger loan. You’re borrowing 95% of the property’s value instead of 80%, so you’ll have to repay based on that higher amount. The government is only guaranteeing the 15% difference. Repayments are up to you.

With a bigger loan, it’s important that you are aware of two things. Your minimum required payment each month will be higher than if you had a 20% deposit. With higher monthly repayments, you need to ensure your budget can comfortably handle this.

While interest is unavoidable on most borrowed money, it’s important to realise you’ll pay more of it over time using the scheme. For the full 30-year term of the loan, you will pay significantly more in total interest because the starting balance you borrowed is higher.

“Negative Equity” if the Market Dips

Negative equity is when the market value of your home falls below the amount you still owe on your mortgage. With only 5% equity to start, you have a much smaller buffer if property prices temporarily decline.

This is mainly a risk if you are forced to sell your home during a market downturn. If you plan to live in the home for the long term (7-10+ years), you can typically ride out short-term market fluctuations. However, it’s a critical risk to be aware of if your circumstances might change.

Intense Competition for Limited Spots

The government releases a set number of “spots” for this scheme each financial year (starting every July 1st). They are extremely popular and are snapped up quickly.

Applicants can’t just apply anytime. You need to be organised and ready to act when the window opens. It’s also important to know, not every bank offers the scheme. This is why working with a broker is a huge advantage. Experienced operators know which lenders have spots available and can get your application prepared and submitted fast and on time, to give you the best chance of securing one.

Decide if it’s right for you

The 5% Deposit Scheme is a powerful tool for disciplined buyers in a rising market who are struggling to save the deposit. It can be a life-changing shortcut to home ownership and a great start to building wealth through property.

However, it’s not a free pass. It comes with the responsibility of managing a larger loan and understanding the associated risks.

The best way forward is to have a clear strategy. At Mortgage Navigators, our experienced team can sit with you, run the numbers on your specific situation and compare the 5% Deposit Scheme against other options (like a guarantor loan) to ensure you’re making the smartest, most confident decision for your future.