Buying your first home with just a 5% deposit sounds like the ultimate shortcut— way to leap into the market faster, avoid years of saving, and skip Lenders Mortgage Insurance thanks to the Australian Government 5% Deposit Scheme. It's promoted as a simple, government-backed boost that helps first home buyers compete in a rising market. But here's the part that gets glossed over: the Home Guarantee Scheme can dramatically change your borrowing power, your home loan serviceability, and your long-term financial stability.
In this episode of Your First Home Buyer Guide, Meighan and Veronica sit down with financial planner James Wrigley to unpack the real math behind buying with a low deposit. James works with young professionals navigating their first major financial decisions, and he breaks down the pros and cons of the 5% deposit scheme with refreshing clarity—including what the scheme genuinely offers, where the risks lie, and why it's not always as "affordable" as it appears on paper.
💡 What the 5% Deposit Scheme Actually Guarantees (And What It Doesn't)
Under the First Home Guarantee Scheme, you can buy with a 5% deposit and avoid LMI — but the government guarantee does not reduce your loan size. If you put down 5%, you're still taking out a 95% home loan, and that has major implications for repayments and risk.
And depending on your city's price caps, the numbers can escalate quickly.
Sydney: With a $1.5M cap, your 5% deposit is $75,000 — but by the time you add stamp duty and legal fees, you're closer to needing $150,000 upfront.
Melbourne: The cap is lower at $950k, but higher stamp duty means many buyers still end up contributing more than they expected.
Many first home buyers discover the hard way that the "5%" can feel a lot more like 10% once real costs are included, even with a government-backed loan for homes.
💬 The Income Reality No One Talks About
Banks assess home loan serviceability based on your ability to repay a 95% loan — not the fact that the government is guaranteeing part of it. Most lenders will only approve around 5–6 times your household income, and to stay out of mortgage stress, repayments should sit under 40% of take-home pay.
According to James: A single buyer in Sydney would need roughly $400,000 income to borrow at the scheme's maximum cap.
A couple would need about $170,000 each, because of the tax-bracket advantages.
Melbourne's thresholds are lower, but still far above what most first home buyers expect.
This is the moment many buyers realise the scheme doesn't make buying cheaper—it simply makes buying possible, if your income can safely support a very large loan.
🏡 The Hidden Risk: No Buffer, No Flexibility
Buying with a 5% deposit gives you access sooner, but it also leaves you more exposed. When you borrow 95%, even small interest rate increases or unexpected expenses hit harder. Many buyers underestimate how tight things become without a financial buffer.
James explains that maxing out your borrowing capacity can leave you: unable to save, unable to invest or build wealth through property, unable to upgrade later, and more vulnerable to mortgage stress if rates rise.
Your first home doesn't have to be your forever home, but it should support your long-term goals. If the loan traps you, or if the property doesn't perform, the path to your second home becomes much harder—especially if you later choose rentvesting or want to use your first home as an investment property.
🎯 The Strategy First Home Buyers Should Focus On Instead
Rather than aiming for the highest price cap or trying to squeeze every government incentive available, Meighan, Veronica, and James emphasise a smarter approach:
Buy a quality asset, not just an eligible one. Know the real costs and long-term implications.
Borrow within your comfort zone. Keep a buffer for life changes. Focus on value, not just price or incentives
The 5% deposit scheme can be incredibly helpful—but only when used with a clear strategy, not as an emotional shortcut. Understanding the pros and cons of the First Home Guarantee Scheme helps you decide whether it's truly worth it for your situation.
If you're considering buying with a low deposit, this episode gives you the grounded, expert-led clarity you need to decide whether the scheme genuinely supports your goals—or whether the trade-offs could cost you far more down the track.
