Buying your first home with 5% deposit

A small deposit doesn’t have to hold you back from buying your first home

Do you have a house deposit of just 5%? While it does make things more complicated, it’s still possible to get a home loan with a deposit of that size. In this article, we’ll explain the three main ways you can buy your first home, despite having a deposit of just 5%:

Low deposit home loan
First Home Guarantee
Using a guarantor.

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Is 5% enough for a house deposit?

While most lenders prefer borrowers with a deposit of at least 20% of the property value, some may be willing to accept borrowers with lower deposits.

So, don’t pay attention to the people who say it’s impossible to get a home loan with such a low deposit. It can be challenging, but it’s certainly not impossible.

Some lenders offer home loans up to 95% of the property’s value, but you may be subject to Lenders Mortgage Insurance (LMI) fees.

Alternatively, some first home buyers may be eligible for the First Home Guarantee which used to be called the First Home Loan Deposit Scheme. It allows eligible first home buyers get a home loan while having a deposit as low as 5%.

The other main option that may be available to low deposit borrowers is to use a guarantor. Keep reading to learn more about each of these three options.

What is a low deposit home loan?

Some lenders will still offer home loans to borrowers with low deposits. In general, the most a lender will provide is a home loan up to 95% of the property value.

A low deposit home loan is a mortgage for borrowers with a deposit below 20%. These loans are considered riskier for lenders to provide, so they mitigate the risk by charging Lenders Mortgage Insurance (LMI). LMI helps to protect the lender in the event that you are no longer able to repay your loan.

LMI can cost thousands of dollars, and it can be paid upfront or sometimes added to your total home loan balance.

What are the benefits of getting a low deposit home loan?

Here are the potential benefits of getting a low deposit home loan:

Get on the property ladder faster: if you don’t need to wait until you’ve saved a 20% deposit, you can buy a home sooner. This means you can jump on a great opportunity or take advantage of competitive interest rates, for example.
Choose a high growth property: if you purchase a property that is likely to experience rapid growth, it won’t take too long until you have a much more favourable Loan to Value Ratio (LVR).

What are the drawbacks of getting a low deposit home loan?

Difficulty refinancing with low equity: if you buy a home with a deposit worth 5% of the property’s value, you’ll have 5% equity (until the property value changes and/or you start repaying the loan amount). This is a low amount of equity and you may find it difficult to refinance your loan until you have more equity. You may be able to refinance, but will likely have to pay LMI again until you have at least 20% equity.
Risk of negative equity: if your property’s value declines, you risk going into negative equity if your LVR is already low.

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What is the First Home Guarantee?

The First Home Guarantee was one of the Home Guarantee schemes introduced in the 2022 Federal Budget.

It's a government scheme designed to help first home buyers own a home sooner by allowing them to buy a home with a minimum deposit of 5%.

Typically, it’s difficult to get a home loan with a deposit under 20% – especially if it’s only 5%. If you are lucky enough to find a lender willing to approve you for a low deposit loan, you are likely going to have to pay for LMI.

While this is a fee that many borrowers are willing to pay in order to buy a home, most would surely rather avoid it, especially with other upfront homebuying costs (e.g. stamp duty, conveyancing, moving costs, loan application fees).

With the First Home Guarantee, you only need to contribute a 5% deposit and the government will guarantee the remaining 15%. This means that the lender will approve you without charging LMI.

How many places does the First Home Guarantee have?

The First Home Guarantee will have 35,000 places per year. In 2021, the First Home Loan Deposit Scheme only had 10,000 places, so this increase will help a lot more first home buyers purchase their first home.

Who is eligible for the First Home Guarantee?

There are a number of criteria that borrowers must meet to be eligible for the scheme, including:

Applicants have to be first home buyers (this includes the applicant’s partner, if purchasing the property together)
Applicants must be Australian citizens who are at least 18 years old
Applicants can apply for the First Home Guarantee as a single person or a couple. If purchasing as a couple, you must be married or in a de-facto relationship
The maximum annual taxable income for single applicants is $125,000
The maximum annual taxable income for couples is up to $200,000
The scheme is for applicants intending to be owner-occupiers, so they must reside in the property, rather than using it as an investment property.

What types of property can be purchased under the scheme?

You can purchase any type of residential property under the First Home Guarantee, such as:

A newly built or existing house, apartment or townhouse
An off-the-plan apartment or townhouse
A house and land package
Land with a build contract to construct the home.

However, there are property price caps for each state and territory. So, you may not be eligible for the scheme if you want to purchase a property that is above the maximum price cap for your location.

You can use the Australian Government’s postcode search tool or refer to the table below to find out the price thresholds:

property price caps for first home guarantee FHBG: NSW, VIC, QLD, TAS, WA, SA, NT, ACT, Jervis Bay Territory and Norfolk Island, Christmas Island and Cocos (Keeling) Islands

What are the other Home Guarantee Schemes?

While the First Home Guarantee is most the relevant to first home buyers, you may also be eligible for the:

Regional Home Guarantee: The Regional First Home Buyer Guarantee works just like the First Home Guarantee, only it is specific to buyers in regional areas with 10,000 places this financial year. So, just like the First Home Guarantee, you can get a home loan with a deposit as low as 5%, with the government guaranteeing the remaining 15%.

Family Home Guarantee:

Again, the Family Home Guarantee is similar, but it allows eligible applicants to purchase a home with a deposit of just 2% minimum! The government can guarantee up to the remaining 18%.

The eligibility criteria are a bit different though, as it’s specifically designed to support single parents. You don’t have to be a first home buyer, but you can’t currently own property.

You must be single and have at least one dependent child. The same property price caps as above apply to the Family Home Guarantee.

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What is a guarantor home loan?

If you have a low deposit – or even no deposit – and want to purchase a home, you might consider a guarantor home loan as an option.

Getting your foot in the property market is difficult, especially with it being so expensive, so it makes sense to look for help.

A guarantor is a third party to your mortgage who offers equity from their own property as security for your new purchase, allowing you to have a low deposit.

In general, a guarantor will be a close family member (e.g. a parent). While they don’t have to hand over any money, they are liable to repay your loan in the event that you are unable to meet your repayment obligations.

This is why getting a guarantor is something that should be carefully considered and it may be worth speaking to a financial advisor together before agreeing to the arrangement.

Example of how a guarantor home loan operates

For example, let’s say you want to buy a $1,000,000 home and have a 5% deposit of $50,000.

You won’t have a lot of home loan options with such a low deposit and will likely pay LMI.

If your parents agree to go guarantor and offer $150,000 of equity from their own home as security for your mortgage, you’ll have a 20% deposit/security and will be able to purchase the property without paying LMI.

They’ll only have to pay money if you fail to keep up with your repayments.

Once you’ve repaid the guaranteed amount or have accumulated enough equity through property value growth, the guarantor can exit your home loan and will no longer be required to be liable for your loan.

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What other low deposit mortgage options are there?

If none of these solutions suit your circumstances, you may need to re-evaluate if trying to get a home loan with a 5% deposit is the right move for you.

The larger your deposit, the more home loan options you’ll find at your fingertips. Consider waiting until you’ve saved a larger amount before looking to apply to some home loans. Even a deposit of 10% is likely to provide you with more options but you’ll probably still have to pay LMI.

Alternatively, if you’re a first home buyer, you may be eligible for the First Home Owner Grant which would give you a decent amount of money to put towards growing your deposit.

Whether you have a deposit of 5% or 35%, our FND Brokers are happy to chat to you about your home loan options. Book an appointment today to learn more.