Should you take advantage of the 5% Deposit if you have a larger deposit
Buying with 5%? How the Australian Government’s Home Guarantee (5% deposit) works and whether you should use it if you already have a bigger deposit
The Australian Government’s Home Guarantee (commonly called the First Home Guarantee or part of the wider Home Guarantee Scheme) now allows eligible buyers to buy a home with a 5% deposit while avoiding Lenders’ Mortgage Insurance (LMI). That is a huge headline and it is exactly why so many first-home buyers and people who have owned before are asking the same question:
If I have already saved a bigger deposit, should I still take the 5% deposit option, or put down a larger deposit?
Below I explain how the scheme works, then walk through the pros and cons of both choices so you can make a practical decision that fits your money, your tolerance for risk, and your life plans.
What the 5% deposit scheme is (quick summary)
The First Home Guarantee is part of the federal government’s Home Guarantee Scheme. It lets eligible buyers purchase their principal residence with as little as 5% deposit while the government provides a guarantee to the lender to avoid LMI. That guarantee reduces the lender’s risk and is what makes 95% Loan-to-Value mortgages possible without LMI for qualifying applicants.
In late 2025 the government expanded the scheme. It raised price caps, removed some previous limits, and increased lender participation. That expansion means more people and more properties are now eligible.
Practically, instead of needing 20% deposit to avoid LMI, you can now, if eligible and using a participating lender, buy with 5% deposit and avoid the LMI bill. The trade-off is that you will have a larger loan and less equity at settlement than if you had put down a bigger deposit.
Two simple example numbers (to keep comparisons clear)
Let’s use an example property price of $800,000 (replace with your target price to run your own numbers):
5% deposit = $40,000 → Loan = $760,000
10% deposit = $80,000 → Loan = $720,000
20% deposit = $160,000 → Loan = $640,000
The loan size difference is meaningful. Taking the 5% option increases your loan amount compared with a larger deposit scenario. Those bigger loans mean higher monthly repayments, more interest over the life of the loan, and greater exposure if house prices fall.
Option A: You have a larger deposit but use the 5% deposit scheme anyway
Why someone would choose this
Keep cash and liquidity. You preserve cash for renovations, moving costs, an emergency buffer, business or family needs, or to invest elsewhere such as shares or paying down higher-interest debt.
Get into the market sooner. If you think prices will keep rising faster than you can grow your deposit, buying now can make sense. The scheme’s point is to reduce the time to ownership, and it does that.
Avoid spending saved cash on LMI. Normally buying with less than 20% would mean paying LMI. The scheme removes that cost.
Pros
More financial flexibility at settlement. You still have your extra savings for a buffer, renovations, childcare, or investment. This is huge if your household needs affordability cushions such as childcare, job risk, or medical costs.
Opportunity cost. If you can earn a better after-tax return or reduce higher-cost debt such as credit cards by keeping cash, the 5% option can be financially sensible.
Avoid LMI fees. LMI can run to many thousands of dollars, sometimes tens of thousands on higher-priced homes. Using the government guarantee can save that expense.
Get on the property ladder sooner. For people who think the market will rise or who want the non-financial benefits such as security and stability, earlier entry matters.
Cons and risks to be aware of
Bigger loan and more interest paid. A 95% LVR mortgage means your principal and interest repayments will be higher every month and you will pay more interest over the life of the loan. Even a small difference in deposit can mean tens of thousands in extra interest across decades.
Less equity and higher negative-equity risk. If prices fall, you are more likely to find yourself in negative equity because you started with less buffer.
Higher repayment stress. Bigger repayments mean less wiggle room in your monthly budget. If interest rates rise or household circumstances change, this can be painful.
Possibly higher ongoing rates. Some lenders charge slightly higher rates or more restrictive features on high LVR loans, even if there is no LMI.
Who this option suits
Buyers who strongly value having cash on hand. This may include parents with young kids, small-business owners, or people who plan renovations or need deposit money for a business.
People with stable, secure incomes and conservative cashflow planning who can handle slightly higher repayments.
Buyers who expect to pay the loan down quickly, for example planning to add extra repayments or refinance when more equity is built.
Option B: You have a larger deposit and put down a larger deposit (10%–20%)
Why someone would choose this
Lower monthly repayments and less interest over the loan term.
Immediate equity buffer, which means you are safer if prices dip.
Better lender options, as lower LVRs often give you access to a wider range of products and sometimes lower interest rates.
Lower stress, as many homeowners sleep better knowing they have a larger buffer.
Pros
Smaller loan and smaller repayments. Using the $800k example, putting down 20% reduces your loan from $760k to $640k. That is a big monthly payment difference and translates into thousands of dollars saved in interest each year.
Avoid LMI without using the scheme. With a 20% deposit you avoid LMI anyway and you will not rely on a government guarantee. You simply carry less risk.
Lower chance of being “mortgage stretched”. Lower repayments mean less chance of financial stress if rates rise or income falls.
Better refinance opportunities. With more equity you may qualify for better rates or easier refinancing when rates are lower.
Cons and trade-offs
Less liquidity. Using your full deposit reduces the cash buffer you might want for emergencies, renovations, or other investments.
Slower entry into the market. If you wait to build up to a 20% deposit, you might lose ground if prices rise faster than your savings.
Opportunity cost. That extra cash locked into the house cannot be used elsewhere. For example, it may not reduce higher-interest debt or generate returns in another investment.
Lower flexibility. Once the deposit is in your property, it is harder to access. You would need refinancing, redraw, or a line of credit to use it later.
Weighing up both choices
The choice between taking the 5% deposit option and putting down a larger deposit is about balancing liquidity, risk, and long-term financial efficiency.
If you value liquidity and flexibility and are confident in your income stability, the 5% deposit scheme can work in your favour, even if you already have a larger deposit saved. It allows you to keep money for other purposes while still getting into the market.
If you value security, lower repayments, and less risk of negative equity, then putting down a larger deposit will make more sense. You will save more in interest, reduce your stress levels, and have a stronger position if property values move against you.
Final Thoughts
The government’s 5% deposit scheme is not automatically better or worse. Its real value depends on your financial position, your goals, and your risk appetite. If your top priority is stability, lower stress, and long-term savings, then using your larger deposit is often the smarter move. If your top priority is flexibility, speed of entry, or maximising your options, then the 5% scheme can be worth considering even when you already have more saved.
Before making the call, it is wise to run the numbers with a broker or financial adviser who can show you the repayments, interest costs, and product options side by side. That way you can see clearly how the two paths compare and which one gives you peace of mind as well as financial strength.
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