The 5% Deposit Scheme Explained: How It Works, What’s Changed and How to Protect Yourself

27 Aug

The 5% Deposit Scheme comes up in almost every conversation I have with first home buyers. It’s one of the most talked about ways into the property market right now, and for good reason. It can get you into your first home years sooner and save you tens of thousands of dollars in lenders mortgage insurance.

There’s also a lot of confusion around it. People think the government is giving them money. They hear it called the First Home Guarantee one week and the 5% Deposit Scheme the next. They see headlines about negative equity and wonder whether it’s safe to use at all.

So I’ve brought everything we’ve covered on the scheme across the podcast into one place: what it is, how the guarantee actually works, who’s eligible, what’s changed and how to protect yourself if you use it.

In this resource we’re covering:

🔑 What the 5% Deposit Scheme is and how the government guarantee works

🔑 Who is eligible for the 5% Deposit Scheme in 2026

🔑 The current 5% Deposit Scheme price caps in each state

🔑 How much deposit you need and the upfront costs on top of it

🔑 How much savings you can keep after settlement under the retained savings rules

🔑 Refinancing while you’re on the scheme and getting out once your LVR drops below 80%

🔑 The negative equity risk and five ways to protect yourself

This resource supports Episode 10 of the First Home Unlocked Podcast, along with Episode 39 and Episode 43, where we covered the risks and the latest changes.

The Key Takeaway 🔑

The 5% Deposit Scheme is an Australian Government scheme, run by Housing Australia, that lets eligible first home buyers buy with as little as a 5% deposit and pay no lenders mortgage insurance. The government guarantees up to 15% of the property’s value to your lender, but you still own 100% of your home and owe 100% of the loan. Used with a buffer, a quality property and a long-term plan, it’s a powerful way into the market.

Now let’s get into the detail.

What Is the 5% Deposit Scheme?

The 5% Deposit Scheme is a federal government program, run by Housing Australia, that lets eligible first home buyers buy a home with as little as a 5% deposit without paying lenders mortgage insurance. It used to be called the First Home Guarantee. If you see that name around, it’s the same scheme.

To see why the scheme matters, you need to understand LMI.

Lenders mortgage insurance (LMI) is a one-off fee a bank charges when you borrow with less than a 20% deposit. It protects the bank, not you, if you can’t repay the loan.

LMI can easily cost tens of thousands of dollars, often 2 to 3% of the purchase price. It’s usually added to your loan, so you pay interest on it for years as well. The federal government estimates that a buyer of a median-priced home with a 5% deposit saves around $23,700 by using the scheme instead of paying LMI.

Is the government giving you money?

No. This is where most people get confused. You don’t receive a grant, the government doesn’t put anything towards your deposit, and it doesn’t own any part of your home. You own 100% of the property.

How Does the 5% Deposit Scheme Guarantee Work?

The government acts as a guarantor to your lender for up to 15% of the property’s value. So when you bring a 5% deposit, the lender treats you as if you had 20%, because Housing Australia covers the gap.

The guarantee is a legal agreement between the government and your bank, and you never see it. If you couldn’t make your repayments, the property had to be sold and the sale didn’t cover what you owed, Housing Australia may pay the shortfall to the bank, up to 15% of the property’s value at the time you bought.

It does the same job LMI would do for the bank. The difference is that you’re not paying for it. Because the bank’s risk is lower, you get:

No LMI, which can save you tens of thousands of dollars
Competitive interest rates, usually close to what a buyer with a 20% deposit is offered
Earlier entry into the market, without saving a full 20% deposit first
Full ownership, with no government share in your home

What the guarantee doesn’t do

I always make sure clients hear this part. The guarantee protects the lender, not you.

You still borrow the full loan amount
You’re responsible for 100% of the repayments
The government doesn’t pay your loan if things get tough
Your lender can still repossess and sell the home if you fall behind
If the sale doesn’t cover the loan, you may still owe money even after the guarantee is applied

So it’s a tool that lowers the lender’s risk and helps more first home buyers get approved. It’s not a safety net for you, which is why the protection strategies further down this page matter so much.

Who Is Eligible for the 5% Deposit Scheme in 2026?

To use the 5% Deposit Scheme, you need to:

Be 18 or older
Be an Australian citizen or permanent resident
Apply on your own or with one other person. Loans with three or more borrowers aren’t eligible.
Not have owned property in Australia in the last 10 years. This is measured from the date your previous property was sold to the date you sign the new loan agreement.
Have at least a 5% deposit, generally from genuine savings
Buy or build a home you’ll live in. Investment properties aren’t eligible.
Buy under the price cap for the area

What changed from 1 October 2025

The scheme was expanded in a big way. Three changes opened it up to far more buyers:

No income caps. Singles used to have to earn under $125,000 and couples under $200,000. Those limits are gone.
Higher property price caps in every state and territory.
No place limits. There used to be a cap on the number of places each year. Now, if you’re eligible, you won’t miss out because the places ran out.

The live-in rules

You need to move in within six months of settlement if you’re buying an existing home, or within six months of the occupancy certificate being issued if you’re building. Then you need to keep living there as your main home while the guarantee is in place.

If you move out or rent the home out, your lender can ask you to start paying LMI or change your loan. So if there’s a real chance you’ll relocate in the next couple of years, factor that in before you go down this path.

What Are the 5% Deposit Scheme Price Caps?

A price cap is the most you can pay for a property while using the scheme. If the property costs more than the cap for that area, you can’t use the scheme. Each state and territory has its own caps, with higher limits for capital cities and some regional centres.

These are the current caps:

NSW: $1.5 million in Sydney, Newcastle and Lake Macquarie, Illawarra, the Central Coast, Coffs Harbour to Grafton, the Mid North Coast and Richmond to Tweed. $800,000 for the rest of the state.
VIC: $950,000 in Melbourne and Geelong. $650,000 for the rest of the state.
QLD: $1 million in Brisbane, the Gold Coast and the Sunshine Coast. $700,000 for the rest of the state.
WA: $850,000 in Perth. $600,000 for the rest of the state.
SA: $900,000 in Adelaide. $500,000 for the rest of the state.
TAS: $700,000 in Hobart. $550,000 for the rest of the state.
ACT: $1 million.
NT: $750,000 in Darwin. $600,000 for the rest of the territory.

You can check the exact cap for any suburb using Housing Australia’s postcode price cap tool.

The 1 July 2026 update added four NSW regional areas to the $1.5 million cap and split the NT into two caps. When a cap jumps like that, more buyers can suddenly compete in that area, and prices tend to adjust once agents and sellers catch on. That’s worth knowing if you’re buying close to the old limit.

A cap isn’t a target

Here’s how I’d think about it. A property fitting under the cap doesn’t make it the right property for you. The higher caps are good news because they open up better quality homes in more established areas. Long-term value, liveability and resale still matter more than squeezing under a number.

How Much Deposit Do You Need for the 5% Deposit Scheme?

You need at least 5% of the purchase price, and your deposit can be anywhere from 5% to 20%. On an $800,000 home, the minimum is $40,000.

Genuine savings is money you’ve saved and held in your own account over time, usually for at least three months.

Most lenders want your deposit to come from genuine savings. A lump sum that landed last week usually won’t count on its own. Gifted money or money from selling something may not count either unless it’s been held for the required time. Rules vary between lenders, so check with your broker early.

The 5% isn’t your total number

This catches people out because the scheme is named after the deposit. On top of the 5%, you’ll still need to budget for:

Stamp duty, which depends on your state, the property price and any exemptions or concessions you’re eligible for
Lender and government fees
Conveyancing and legal costs
Building and pest inspections, sometimes several if you miss out on a few properties
Moving costs, furniture and setup
A cash buffer, so you’re not left with nothing after settlement

Should you put in more than 5%?

Not always. If you’ve saved more than 5%, some buyers are better off putting in the minimum and holding the rest back as a buffer. Others put in more to bring their repayments down.

I had a client use the scheme with an 8% deposit rather than the 5% minimum. Their goal was to keep repayments under $3,500 a month, and that deposit got them there while still leaving enough for their upfront costs and buffers. The right deposit isn’t just what the scheme allows. It’s what fits your budget and your plan.

If you already have a full 20% deposit and your buffers sorted, you generally won’t need the scheme. You’ll also have more lenders to choose from without it.

How Much Savings Can You Keep Under the 5% Deposit Scheme?

For scheme places reserved from 1 July 2026, you can keep up to six months of bank-assessed living expenses plus six months of loan repayments after settlement. If you’re building, you can keep an extra 5% on top of that.

Retained savings is the money left in your accounts after settlement. It doesn’t include your deposit or stamp duty. It’s your emergency fund, furniture money and moving costs.

Before this change, it was more case by case. Now there’s a hard ceiling. The government’s aim makes sense on paper: keep the scheme for buyers who genuinely need a low deposit, not someone with a big inheritance sitting in the bank. Even genuine low deposit buyers need a buffer, though.

Each lender can also set tighter limits under that ceiling, and some cap retained savings at a set dollar amount. Recently I had a client who wanted to keep around $65,000 after settlement, but their lender only allowed $50,000. The only way to keep the extra $15,000 for furniture was to get quotes from a furniture retailer and send them to the lender to assess.

This is where choosing the right lender really counts. Sometimes it makes sense to go with a lender that doesn’t have the cheapest rate on the scheme but lets you keep a bigger buffer.

How Long Does a 5% Deposit Scheme Place Last?

Your place in the scheme is reserved with your pre-approval and lasts 90 days. It can usually be extended once for another 90 days, which gives you around 180 days to buy. After that, you go back through the application process to reserve a new place.

Pre-approval is a lender’s conditional green light on how much you can borrow, given before you’ve found a property.

Can You Refinance While Using the 5% Deposit Scheme?

Yes. You can switch to another participating lender and keep the guarantee, as long as you borrow the same amount and don’t extend the loan term. Think of it as a straight swap: same loan, better deal, different lender.

From 1 July 2026, that swap got easier:

You now have 42 days instead of 30 to complete the switch
You can add refinancing fees and costs to the new loan instead of paying them upfront

If you refinance to a lender that isn’t on the scheme while you still need the guarantee, you’ll lose it and may have to pay LMI.

How do you get off the scheme?

You no longer need the guarantee once your loan to value ratio drops below 80%.

Loan to value ratio (LVR) is your loan amount as a percentage of the property’s value.

You get there by paying down the loan, through growth in the property’s value, or a mix of both. From there, you can refinance to any lender under the normal rules, with no LMI. Plenty of buyers already have. Housing Australia’s 2023–24 report showed that almost 1 in 5 households who’d used the scheme had already moved on from it.

What Are the Risks of the 5% Deposit Scheme?

The main risk is that you start with very little equity. With a 5% deposit you’re borrowing 95% of the property’s value, so if prices fall in your first few years, you could owe more than the home is worth.

Negative equity is when you owe more on your mortgage than your property is currently worth.

Say you buy a home for $900,000 with a 5% deposit. You’ve borrowed $855,000. If the value drops around 6% to $846,000, you’re technically in negative equity.

Every time economists forecast price falls, this is the risk the headlines connect to the scheme. Forecasts change as conditions change, and they don’t all agree, so nobody really knows what prices will do in the next six months. What matters more is understanding what you’re buying and having a plan for whatever comes.

When negative equity actually becomes a problem

Being in negative equity on paper isn’t automatically a crisis. Your repayments don’t change. The bank doesn’t call asking for more money. You keep living in your home.

It only becomes a real problem if you’re forced to sell while you’re in that position, because you’d have to cover the gap yourself. So the whole goal is making sure you’re never forced to sell early. For context, the government reported in October 2026 that 99% of scheme borrowers are ahead of or on track with their repayments.

How to Protect Yourself When Using the 5% Deposit Scheme

These are the five strategies I go through with every client using the scheme:

Know your numbers before you borrow. The bank will lend you a maximum, but that’s not the number to aim for. Work out your real income, expenses and commitments, then check your repayments still work at higher interest rates than today’s. You want the number that lets you sleep at night.
Build your buffer early. Aim for an emergency fund covering three to six months of living expenses, ideally in your offset account so it’s still reducing your interest. With a 95% loan you have less room to move, so this buffer is what stands between a surprise bill and a hard decision about your home.
Buy for the long term. Buying and selling are expensive, and your property needs time to grow. Go in with the mindset of holding for at least five to ten years, and make sure the property fits your life over that time. You only lock in a loss if you sell during a downturn.
Do the work on asset quality. Homes with strong owner-occupier demand, good infrastructure and access to jobs, schools and amenities tend to hold their value better through market cycles. The homes most at risk are often ones that mainly appealed to investors rather than being great places to live.
Protect your income. The biggest risk to holding your home usually isn’t a price drop. It’s losing your ability to earn. Income protection covers you if illness or injury stops you working, though not job loss, so your buffer still matters. Talk to a financial planner or insurance broker about what you need.

If you’ve already bought using the scheme

If you bought a quality home you plan to stay in, stress-tested your numbers and have your emergency fund in place, you’ve already done the work that matters most. Keep building equity through your repayments, keep your offset topped up and stay focused on the long term.

If repayments are feeling tight, pick up the phone early. Your broker has options well before things ever get close to a forced sale, from restructuring your loan to changing how you repay it. The earlier you have that conversation, the more options you have.

Final Thoughts

The 5% Deposit Scheme is one of the best pathways first home buyers have had in a long time. It’s helped hundreds of thousands of Australians into their homes sooner, and the expansion means far more people can use it now.

I still treat it as a tool, not the whole strategy. The question isn’t just whether you can use it. It’s whether it fits what you’re trying to do. Get clear on your goals first, buy the best quality home you can, keep a buffer and plan to hold for the long term. That’s what turns a 5% deposit into a confident decision.

If you’re thinking about using the scheme, you can book a Get to Know You Chat with me. I’m a mortgage broker and I work with first home buyers every day. We’ll check what you’re eligible for, how much deposit and buffer makes sense for you, and which lender fits your plan.

Description text goes here
Description text goes here
Description text goes here

Buying Process

Jack Elliott