Australia's New 5% Home Deposit Scheme Explained

Getting into the market with just 5%: What's changing in Australia's home deposit rules

The shift: from 20% (or more) to 5%

Historically, aspiring homebuyers in Australia have often needed a 20 per cent deposit (or at least close to it) to avoid paying Lenders' Mortgage Insurance (LMI). That barrier has been a major hurdle: even as house prices rose rapidly, wages didn’t keep pace, making deposit saving a long slog.

To help more people “get a foot in the door,” the Australian government is expanding and rebranding its home guarantee support as the Australian Government 5% Deposit Scheme, effective 1 October 2025.

Here are the key changes:

• The scheme will now have unlimited places (no more caps on how many people can participate).
• Income caps are removed — previously, only lower-to-middle incomes qualified; from October, more people will be eligible.
• Property price caps are increased to reflect current market levels (so you can aim for more expensive homes under the scheme).
• First home buyers (or eligible applicants) will need to have saved a minimum 5% deposit (but less than 20%) and meet other eligibility criteria.
• In effect, the government (through Housing Australia) will guarantee part of your loan (up to 15%) so that you won’t need to pay LMI.
• You must be buying an owner-occupied home (not an investment property) and intend to live in it within a certain timeframe.

Previous limits on how many places and restrictions on who could apply (e.g. income, thresholds) will be relaxed or removed.

For example, new price caps under the expanded scheme will be (among others) A$1,500,000 in greater Sydney, A$950,000 in greater Melbourne, and A$1,000,000 in greater Brisbane.

In short: you’ll be able to buy with less up-front capital, more people will qualify, and more properties will fall within the allowable price range.

Who stands to benefit — and who should be cautious

The expanded 5% deposit scheme is designed to make home ownership more accessible. But like any policy, it comes with trade-offs.

The upside (why people are interested)

1. Faster entry into home ownership - Instead of years of saving 20%, many buyers will now need only enough for a 5% deposit — cutting the time to entry substantially.
2. Avoiding Lenders’ Mortgage Insurance (LMI) - Because the government guarantee substitutes for what LMI would otherwise cover, buyers can avoid paying tens of thousands in insurance fees.
3. Greater inclusivity - With income caps removed and unlimited places, more people—including those previously excluded due to income thresholds—can apply.
4. Access to more desirable suburbs - With raised property caps, first homebuyers can consider homes in suburbs that were formerly out of reach under previous schemes.
5. Potential savings overall (if housing and interest conditions hold) - For a buyer who otherwise couldn’t save enough, this scheme may open up opportunities they would not have had. Some real estate commentators hail it as one of the most significant interventions for first home buyers in decades.

The risks and criticisms (why not everyone is applauding it)

1. Much higher debt, thinner equity buffer - Buying with a 5% deposit means your loan-to-value ratio (LVR) is around 95%. That leaves minimal equity cushion. If property prices fall—or if you need to refinance—you may be exposed to negative equity risk.
2. Greater vulnerability to interest rate rises - With so little deposit, even modest interest rate increases can hit mortgage repayments hard. Some prospective buyers have warned of a “lifetime of debt” under such conditions.
3. Banks may charge higher interest rates or stricter conditions - Lenders often see low-deposit borrowers as higher risk, so interest rates or borrowing criteria may be less favourable.
4. Stimulating demand without fixing supply - Critics argue that boosting buyer demand (by lowering deposit barriers) without simultaneously increasing housing supply may push property prices even higher, worsening affordability in the long run.
5. Benefiting those already close to qualifying more than the truly disadvantaged - Some economists warn that the scheme will disproportionately help buyers who were already near market entry, rather than those who are very behind in capital accumulation.
6. Competition intensifies - With more qualified buyers in the market, competition for desirable homes could intensify (bidding wars, faster sales), especially in growth corridors.
7. Long-term servicing risk and financial strain - Even if you manage to get into a home, servicing a high-debt mortgage while handling maintenance, insurance, property costs, and life events (job loss, health costs) can be stressful.

In short: this scheme is a tool, not a guarantee. It helps lower one barrier, but it introduces new risks—and amplifies existing ones—especially for those with less financial flexibility.

Real stories and reactions (how people are responding)

• Some prospective buyers and commentators are enthusiastic. They see this as a rare chance to break into a market that has felt locked to younger generations.
• Others are more cautious or critical. One analysis suggested that under the 5% scheme, for certain buyer profiles, mortgage repayments could consume over 50% of take-home income, versus 42–43% under more conservative assumptions.
• Policy critics have described it as a “bandaid fix” that may worsen housing bubbles or exacerbate inequality.
• Some financial commentators argue that it may incentivize buyers to overextend themselves, particularly in overheated markets or regions where property growth is volatile.

These mixed responses underscore that while the scheme is promising for many, it is not risk-free—and outcomes will depend heavily on individual circumstances and market conditions.

Why you should seek legal and financial advice before signing up

Given both the opportunities and pitfalls, before committing to a 5% deposit purchase under this scheme, there are several reasons to engage professionals:

1. Legal advice: protect your rights and understand obligations

• Contract review and conditions - Purchasing real estate involves complex contracts (e.g. cooling-off periods, conditions of settlement, vendor clauses). A lawyer or conveyancer can help ensure you’re not inadvertently signing a bad deal.
• Scheme compliance and eligibility - The scheme has eligibility rules (residency, previous property ownership, occupancy obligations). Legal counsel can help you verify you truly qualify before you make commitments.
• Understanding guarantee liability - The government guarantee is not absolute. In the event of default, your mortgage, property rights, and liabilities may still be affected, and legal advice helps clarify the risks.
• Title, easements, and encumbrances - Lawyers will check whether there are burdens on the land (easements, covenants, leases) that could reduce its value or flexibility.
• Disclosures and warranties - Making sure all vendor warranties, building inspection reports, and disclosures are properly documented can help reduce later disputes.

2. Financial advice / mortgage advice: assess affordability and strategy

• Cash flow and stress testing - A financial planner or mortgage broker can model different interest rate and income scenarios to assess whether you can safely sustain repayments, including buffer periods.
• Loan structure optimization - They can advise whether a fixed or variable rate is wiser in your case, what length of term to choose, whether to factor in redraw facilities, offset accounts, etc.
• Comparing participating lenders - The 5% deposit scheme will be offered via participating lenders. Different lenders may have different terms, fees, and risk tolerances. A financial adviser can help you pick the best one.
• Cost estimates beyond the deposit - You’ll need to cover stamp duty, legal fees, inspection costs, moving costs, ongoing maintenance, insurance, strata or council fees, etc. A professional can help you budget realistically.
• Exit strategies and refinancing - Advice on when (and whether) to refinance, when to pay down extra principal, or whether to shift structures later (e.g. selling, renting out) is valuable.
• Risk mitigation - A planner can advise on appropriate buffers, insurance, and contingency plans in case your income is disrupted.

3. Avoiding regrets and unintended burdens

Many buyers in low-deposit situations regret over time that they locked in high-risk financial positions. Some may struggle with negative equity, refinance difficulties, or limited flexibility. Seeking advice helps you avoid decisions you might later regret.

Tips if you’re considering joining the 5% deposit scheme

• Don’t stretch to the maximum — just because you may qualify for a higher amount or pricier property doesn’t mean you should take on the maximum debt.
• Run “what-if” scenarios — imagine interest rate increases, job loss, maintenance surprises, etc.
• Build buffers — keep emergency savings and avoid living paycheck to paycheck.
• Choose participating lenders carefully — shop around for banks that offer favorable terms for low-deposit borrowers.
• Avoid bidding wars and overpaying — competition will be fierce; don’t let scheme momentum push you into a bad deal.
• Know the finer scheme rules and exclusions — read the fine print and get legal advice early.
• Have an exit / fallback plan — if the market turns or your financial situation changes, how would you recover?

Final thoughts

The expanded 5% deposit scheme is a bold move by the Australian government to lower hurdles to homeownership. For many prospective buyers, it offers a real opportunity to enter the property market sooner than they ever expected. But it is not risk-free — taking on high leverage, relying on property growth, and navigating a competitive market can strain even well-prepared households.

If you’re thinking of signing up, it’s imperative to get legal advice (to understand contracts, scheme rules, liability) and financial / mortgage advice (to model affordability, compare lenders, and stress-test your plans). That way you can enter with your eyes open and set yourself the best chance of success, rather than falling into trap scenarios.