Benefits and risks of the 5% Deposit Scheme
By Ali Hasani, Founder and Principal Mortgage Broker at Buyvest, MFAA accredited. Last updated July 2026. Scheme settings verified against Treasury and firsthomebuyers.gov.au.
This guide puts both sides honestly, including the case made by the scheme's critics. If you want how the scheme works and who qualifies, that sits in our full 5% Deposit Scheme guide.
The short version: You skip years of saving and avoid Lenders Mortgage Insurance, which published estimates put somewhere between $20,000 and $60,000 depending on loan size and location. In exchange you carry a larger loan, pay more interest across its life, and hold almost no equity buffer if values fall. Whether that trade works depends less on the market than on how stable your next few years look.
What are the benefits?
You buy sooner with far less cash, and you avoid LMI entirely. On an $800,000 purchase that is $40,000 rather than $160,000 upfront, a difference of $120,000 that most people would spend years accumulating.
You stop waiting
Saving 20% in Sydney takes most first home buyers the better part of a decade, during which prices may move away from them. A 5% deposit removes that race. You start paying down your own loan instead of someone else's, and any growth accrues to you rather than passing you by. Our genuine savings guide covers how to get the 5% into a form lenders will accept.
No Lenders Mortgage Insurance
Housing Australia guarantees up to 15% of the property value, which is what removes LMI on a loan between 80% and 95% LVR. Published estimates for the premium you avoid typically run around $11,000 to $18,000 on a $600,000 purchase and around $25,000 to $35,000 on $900,000, climbing further at higher prices. Treat those as ranges. Premiums vary by insurer, lender, loan size and borrower profile, and two buyers at the same price can be quoted very differently.
No income caps and no queue
Treasury confirms the number of places is uncapped, income caps have been removed, and property price caps have been increased across all streams. There is no allocation to beat and no income level that shuts you out, which was not the case before October 2025.
It stacks with the state benefits
The scheme sits alongside the NSW stamp duty exemption on homes up to $800,000, and the $10,000 First Home Owner Grant where the home is new and under $600,000. That grant cap is lower than the duty threshold, so check it rather than assuming. You can also build the deposit itself through the First Home Super Saver Scheme.
One correction worth making. The guarantee removes LMI. It does not standardise your interest rate. Participating lenders set their own rates, fees and credit criteria on scheme loans, so the same borrower can receive materially different offers from two lenders on the panel. Comparing the panel is where the money is.
What are the risks?
A 95% loan means higher repayments, more interest over the life of the loan, and almost no equity buffer. The buffer is the one that matters, because it determines what options you have if something changes.
A bigger loan costs more, for longer
Avoiding LMI is a saving on day one. Borrowing 95% instead of 80% is a cost every month for as long as you hold the loan, and the interest difference across a full term is considerably larger than the LMI you avoided. That is not an argument against the scheme, but it is the part that gets left out of the marketing. Model it properly with our mortgage repayment calculator before you decide.
Negative equity, and when it actually bites
Negative equity means owing more than the property is worth. With 5% down, a modest fall plus selling costs is enough to put you there, and Australian mortgages are full recourse, so the debt does not simply disappear with the property.
Here is the part usually explained badly. If you hold the property and keep paying, negative equity is largely a number on a statement. It becomes a genuine problem when life changes and you need options you no longer have. Needing to sell. Separating from a partner. Relocating for work. Refinancing to a better rate. Illness, or losing income. A family change that means the home no longer fits.
None of those are unlikely over a five to ten year horizon, and each one is harder with no equity. That is the honest framing of the risk, rather than simply saying values might fall.
The price cap cuts both ways
In NSW the cap is $1,500,000 for Sydney, the Illawarra, Newcastle and Lake Macquarie, and $800,000 elsewhere in the state. Both your purchase price and your lender's assessed value must sit at or below it. Buying right at the cap leaves no margin, and a bank valuation that lands differently from your contract price can put the purchase outside the scheme. With a 5% deposit there is nothing spare to cover a shortfall either.
What the critics say
The expanded scheme has drawn substantive criticism, and it is worth reading rather than dismissing. Morningstar has argued the scheme is bad for both homeowners and the country, pointing out that buying with a 5% deposit produces higher interest expenses and slower accumulation of equity. Its sharpest data point is that the average first home buyer loan reached $607,624 in December 2025, a 24.6% rise in a single year that far outstripped national price growth of roughly 10%. Loans growing faster than prices is what you would expect from a policy that lets 5% deposits reach $1.5 million properties, and the concern is that easier borrowing feeds back into prices.
The counter-argument, put by Smart Property Investment among others, is that some of this concern is valid and some is exaggerated, and that the answer is not to scare first home buyers away from property but to make sure nobody walks into a debt structure they do not understand. That is closer to our view. The scheme is a tool. Used with a buffer, a realistic budget and a plan to release the guarantee, it works. Used to buy the most expensive thing a lender will approve, it is fragile.
Is your borrowing capacity a target or a ceiling?
It is a ceiling. The figure a lender approves is the most it is willing to risk, not the amount you can comfortably live with, and the gap between those two numbers is where most financial stress starts.
Lenders test your application against a buffer above the actual rate, which is a genuine protection. But that test is about whether you will keep paying them. It says nothing about whether you will still be able to take a holiday, absorb a car repair, change jobs, or start a family. Your bank does not sit at your kitchen table when the bills arrive.
A practical approach is to work out what repayment you could sustain for a year if one income stopped, and treat that as your real limit. Then keep a cash buffer separate from your deposit, because with 5% equity you have no ability to draw on the property if something goes wrong. Our budgeting guide works through the whole picture.
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How do you release the guarantee?
The guarantee attaches to your original loan. Once you reach 20% equity, you can refinance to any lender without LMI and the guarantee falls away. Having a plan to get there is the single best thing you can do to manage the risks above.
Equity builds two ways. Your repayments reduce the loan, and growth increases the value. You control the first and not the second, so the first is where a plan does its work.
Three things move you towards 80% LVR faster. Extra repayments, even modest ones, because at 95% LVR almost your entire early repayment is interest. An offset account, which reduces the interest charged without locking the money away, so it doubles as your emergency buffer. And avoiding a refinance too early, because refinancing while still above 80% can reintroduce LMI with a new lender who has no guarantee to rely on.
Once you are at or below 80%, the panel restriction disappears and the whole market is available to you. Use our home equity calculator to see where you sit, and review it annually rather than waiting for a rate rise to prompt you.
Treat this as the exit plan, not an afterthought. Buyers who enter the scheme with a target LVR and a date attached tend to get out of it years earlier than buyers who simply make minimum repayments and hope the market does the work.
Is the scheme right for you?
It suits buyers with stable income, a cash buffer beyond the deposit, and a realistic intention to hold for at least five to seven years. It suits poorly anyone buying at the absolute limit of what a lender will approve.
Reasonable signs it fits: your income is steady and your job secure, your likely repayment is close to what you already pay in rent, you have savings left after the deposit and costs, and you can see yourself in the property for years rather than months.
Reasonable signs it does not: you are already close to a 20% deposit and would only be buying sooner for its own sake, your income is variable or your role is uncertain, you would have nothing left after settlement, or the only way the numbers work is by borrowing your maximum.
If it is not the right fit, the alternatives are real. Help to Buy takes an equity share in exchange for a much smaller loan, which reverses the risk profile. A guarantor loan removes LMI using family equity. Some lenders waive LMI for certain professions, covered on our no LMI home loan page. Or you keep saving. Our deposit options guide compares them.
Frequently asked questions
Are places under the 5% Deposit Scheme limited?
No. Treasury confirms the number of places is uncapped and there is no waiting list, alongside the removal of income caps and higher property price caps across all streams. Every eligible applicant can access a guarantee. What still varies is each participating lender's own credit policy, which is a separate question from scheme availability.
Does the scheme give me a better interest rate?
Not automatically. The guarantee removes LMI, but participating lenders set their own rates, fees and credit criteria on scheme loans. The same borrower can receive noticeably different offers from two lenders on the panel, so comparing across the panel matters as much as qualifying in the first place.
What happens if I end up in negative equity?
You remain responsible for the full loan. The guarantee protects the lender, not you, and Australian mortgages are full recourse. If you hold the property and keep paying, it is largely a number on a statement. It becomes a real problem if you need to sell, separate, relocate, refinance, or lose income, because a thin equity position removes your options at exactly the moment you need them.
How long until I can refinance out of the scheme?
Once you reach 20% equity you can refinance to any lender without LMI, and the guarantee falls away. Getting there depends on your repayments and on growth. Extra repayments and an offset account both accelerate it. Refinancing while still above 80% can reintroduce LMI, so timing matters.
Can I use the scheme for an investment property?
No. It is for owner occupiers, and you must live in the home. Converting it to an investment later means refinancing out of the scheme, and if your LVR is still above 80% at that point, LMI becomes payable. Plan any transition rather than assuming it.
Do I have to be a first home buyer?
No. You qualify as a first home buyer, or if you have not owned property or land in Australia in the last 10 years. Single parents and single legal guardians can access a 2% deposit stream within the same scheme, previously called the Family Home Guarantee, which also has no income caps.
What property types are eligible?
Houses, townhouses, apartments, house and land packages, off the plan purchases and building on vacant land with a construction contract, provided the price sits at or below the cap for that location and the home will be your residence. Both the purchase price and the lender's valuation must clear the cap.
What if I am not eligible?
Look at Help to Buy, a guarantor loan, a professional LMI waiver if your occupation qualifies, or the NSW stamp duty exemption and First Home Owner Grant, which are separate from the federal scheme. Our deposit options guide covers each pathway.
Next steps
Model the numbers before you decide. The property deposit calculator shows what different deposits support, the mortgage repayment calculator shows what a 95% loan actually costs each month, and the home equity calculator shows how far you are from releasing the guarantee.
Then read the full 5% Deposit Scheme guide for eligibility and application, and the pre-approval to settlement guide for what happens next.
Learn more about our team, or see our service areas across 220+ Sydney suburbs.
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Related resources
5% Deposit Scheme guide | Genuine savings | Deposit options | LMI explained | Loan to Value Ratio | Budgeting guide | Help to Buy
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This article is general information only and does not take your personal circumstances into account. LMI figures are indicative ranges and vary by insurer, lender and borrower. Scheme rules, price caps and lender policies change, so confirm current settings with a participating lender or Housing Australia before relying on them. Views attributed to third parties are their own and are included to present a balanced picture. Ali Hasani is an Authorised Credit Representative (CRN 567392) of Connective Credit Services Pty Ltd (Australian Credit Licence 389328).
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Please note that the views and opinions expressed in this post are general information only, and this is not financial advice.
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