5% Deposit – Benefits and risks
However, like any financial decision, it comes with both significant benefits and real risks worth understanding before you commit. This guide gives you a balanced view of both sides so you can make an informed choice. For a full overview of how the scheme works and eligibility requirements, read our complete Home Guarantee Scheme guide.
Quick summary: The HGS lets you buy sooner with less deposit and no LMI, potentially saving $10,000 to $65,000+. The risks include higher repayments due to a larger loan, the possibility of negative equity if property values fall, property price cap restrictions, and potential valuation shortfalls. Understanding both sides helps you decide if the scheme is right for your situation.
Benefits of the Home Guarantee Scheme
Lower deposit requirements
The most significant benefit is that you can buy a property with just a 5% deposit instead of the standard 20%. This dramatically reduces the upfront cost burden and the time required to save. For a first home buyer targeting an $800,000 property, the difference is saving $40,000 (5%) versus $160,000 (20%). That is $120,000 less you need to accumulate before entering the market. Our genuine savings guide explains how to build your 5% deposit to meet lender requirements.
Elimination of Lenders Mortgage Insurance
Under the HGS, you pay no Lenders Mortgage Insurance on loans between 80% and 95% LVR. Without the scheme, LMI on an $800,000 property with a 5% deposit would cost approximately $31,940. On a $1,500,000 Sydney property, the saving jumps to approximately $65,861. That money stays in your pocket or goes toward your deposit and moving costs instead. Use our property deposit calculator to model the impact for your target property price.
Competitive interest rates
Despite the smaller deposit, you typically access standard variable or fixed rates with no "high LVR" rate premiums. This means your ongoing repayments are based on competitive rates from participating lenders, with the same features and flexibility as standard loans. Our choosing the right finance guide helps you compare loan types and features across different lenders.
Combine with other first home buyer benefits
The HGS can be stacked with other programmes for maximum impact. You can combine it with NSW stamp duty concessions saving up to $30,529, claim the First Home Owner Grant worth $10,000 on new properties, and use the First Home Super Saver Scheme to build your deposit faster through superannuation. When combined, these benefits can total over $70,000 in savings and support for eligible buyers. Our pathways to home ownership guide shows how all these programmes work together.
Who qualifies?
You must be a first home buyer or have not owned a home in the last 10 years. You need to be an Australian citizen or permanent resident and intend to live in the property as your principal place of residence. Single parents or legal guardians with dependants may qualify under the Family Home Guarantee, even if they have previously owned property, provided they meet specific criteria. For full eligibility details, read our Home Guarantee Scheme guide.
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Risks of the Home Guarantee Scheme
While the HGS offers significant benefits, it is essential to understand the potential risks before proceeding. An informed decision requires looking at both sides.
Higher Loan to Value Ratio means larger repayments
The HGS enables you to borrow up to 95% of your property's value, which means a larger loan and potentially higher monthly repayments compared to buying with a 20% deposit. Understanding your Loan to Value Ratio is crucial to evaluate whether you can comfortably manage these increased repayments. Our budgeting guide helps you assess what you can realistically afford month to month, not just what a lender will approve.
Risk of negative equity
Negative equity occurs when your property's market value drops below your outstanding loan balance. With only 5% equity at purchase, you have a smaller buffer against market downturns compared to someone who bought with 20%. If you were forced to sell during a downturn, you could owe more than the property is worth. Purchasing in areas with strong growth potential and planning to hold the property long-term helps mitigate this risk. Our guide on location, condition, and vibes helps you assess suburb growth potential.
Property price cap restrictions
The HGS comes with specific property price caps that vary by location. In Sydney and major regional centres in NSW, the cap is $1,500,000, while other areas in NSW are capped at $800,000. This means some properties or suburbs may fall outside the scheme's limits. You may need to adjust your property search to stay within these thresholds. Whether you are looking at a freestanding house, a strata apartment, or vacant land with a construction contract, the price cap applies.
Valuation shortfall risk
If the bank valuation comes in lower than your agreed purchase price, you face a funding gap. With only a 5% deposit, there is very little room to absorb a shortfall. You might need to renegotiate the purchase price, provide additional funds to cover the gap, or reconsider the property entirely. Understanding the property purchase and valuation process before you make offers helps you avoid this situation.
Balanced view: The HGS opens doors to home ownership with reduced initial costs, but it is important to approach it with a full understanding of the risks. The lower your deposit, the more exposure you have to market movements and the higher your ongoing repayments. Having an emergency savings buffer beyond your deposit provides additional protection.
Making the right decision for your situation
The Home Guarantee Scheme is not right for everyone, but for many first home buyers it represents the fastest and most affordable pathway into the market. The key is understanding how the benefits and risks apply to your specific financial position.
Consider using the HGS if you have stable income but limited savings, if you are currently paying rent similar to what mortgage repayments would be, if you are buying in an area with strong long-term growth prospects, or if you plan to hold the property for at least 5 to 7 years. It may be worth considering alternatives if you are already close to a 20% deposit, if your income is variable or uncertain, or if you are buying at the very top of your borrowing capacity with no financial buffer.
Whether you purchase through private treaty, auction, or off the plan, having pre-approval with a participating lender confirmed before you start searching gives you confidence and clarity. Our first home buyers journey guide walks you through the complete process from preparation to settlement.
If the HGS does not suit your situation, alternatives include the Help to Buy (Shared Equity) Scheme where the government co-purchases with you using just a 2% deposit, a family guarantee where parents use their property equity to help you avoid LMI, professional LMI waivers available for certain occupations, or saving a larger deposit to reduce your LVR. Our deposit options guide explores every pathway available.
Frequently asked questions
What is the difference between the Home Guarantee Scheme and Lenders Mortgage Insurance?
The Home Guarantee Scheme is a government initiative that guarantees a portion of your home loan, allowing you to purchase with a smaller deposit without paying Lenders Mortgage Insurance (LMI). LMI is an insurance policy that protects the lender if you default on your loan when borrowing more than 80% of the property value. The HGS effectively replaces the need for LMI, saving you thousands of dollars in upfront costs. Use our home equity calculator to explore different deposit scenarios.
Can I use the Home Guarantee Scheme for an investment property?
No. The Home Guarantee Scheme is specifically designed for owner-occupiers. You must intend to live in the property as your principal place of residence. After living in the property for the required period, you could potentially convert it to an investment, though you should seek financial advice about the implications, including whether LMI would become payable if your equity is below 20% at that point.
Are there limited places available under the Home Guarantee Scheme?
The scheme has broad availability, but each participating lender has its own allocation and policies. This is why working with a mortgage broker who has access to multiple participating lenders is valuable. We can identify which lenders have available places and match you with the one whose criteria best suit your situation.
What happens if property values decline and I end up in negative equity?
If property values decline and you end up in negative equity (owing more than the property is worth), you are still obligated to repay the full loan amount. The government guarantee protects the lender, not you. This situation primarily becomes problematic if you need to sell the property. To mitigate this risk, consider purchasing in areas with strong growth potential, maintain a financial buffer, and plan to hold the property long-term if possible.
Can I buy any type of property with the Home Guarantee Scheme?
Properties must fall within the price caps set for your location and be residential in nature. You can purchase a freestanding house, apartment, or townhouse, whether new or established. Vacant land is eligible only if accompanied by a construction contract. The property must be suitable for use as your principal place of residence. Use our property deposit calculator to model different property prices.
Do I need to be a first home buyer to use the Home Guarantee Scheme?
For the First Home Guarantee, you must be a first home buyer or have not owned a home in the last 10 years. The Family Home Guarantee is available to single parents or legal guardians with dependants regardless of whether they have previously owned property, provided they do not currently own property and meet other eligibility criteria.
How long do I need to live in the property?
You must move into the property as your principal place of residence within the timeframe specified by your lender after settlement. While there is no explicit minimum occupancy period, changing the property to an investment will require you to refinance out of the scheme. If your Loan to Value Ratio is still above 80% at that point, LMI will become payable. Plan any transition carefully with your mortgage broker.
Can I refinance a loan under the Home Guarantee Scheme?
Yes. If refinancing with less than 20% equity, you may need to stay with a lender participating in the scheme. Once you have built up 20% or more equity through repayments and capital growth, you can refinance with any lender without restrictions. Understanding your refinance timeline and equity position is important for long-term planning.
What if I am not eligible for the Home Guarantee Scheme?
If you are not eligible, alternative options include saving for a larger deposit to avoid or reduce LMI, exploring NSW stamp duty concessions and the First Home Owner Grant, considering a guarantor loan where a family member provides additional security, looking into the Help to Buy (Shared Equity) Scheme, or investigating professional LMI waivers for certain occupations. Our deposit options guide covers all available pathways.
Take the next step
Understanding the benefits and risks of the Home Guarantee Scheme is an important part of your first home buyer journey. Use our property deposit calculator to model different deposit scenarios, our home equity calculator to understand LVR at different deposit levels, and our mortgage repayment calculator to see what repayments would look like with a 5% deposit.
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Related resources for first home buyers
Continue building your knowledge with our complete Home Guarantee Scheme guide for eligibility and application details, our genuine savings requirements guide to understand what lenders expect, our deposit options guide for every pathway to your first deposit, our LMI guide to understand what the scheme saves you from, and our budgeting guide to assess what you can comfortably afford.
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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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