5% Deposits have been in the press a lot lately with the Australian Federal Government’s First Home Guarantee Scheme. If you’re thinking about a purchase with just 5% down (a 95% loan-to-value ratio, or LVR), you’re not the only one. Rents remain high, and property prices haven’t budged much. Many Australians are wondering whether it makes more sense to make a small deposit now or to hold off until they save 20%. Here at Roger Boghani, as advisers to people, families and small businesses across Melbourne, we see both sides: the chance to end renting earlier and the very real dangers that can set you back if the math doesn’t work out.
In this guide, we aim to take you through the key points, potential drawbacks, and practical safety measures in simple terms, so you can make an informed decision with the confidence to make an informed choice. It’s for people buying their first home and those who plan to live in the property, but those looking to invest will also find the basic ideas helpful.
To start, what does “5% deposit / 95% LVR” mean?
- Deposit means the money you pay upfront: if you’re buying for $700,000, 5% equals $35,000 (plus expenses like stamp duty where applicable). *Stamp Duty varies by state; check out this helpful guide to arm you with up-to-date information for your state.
- LVR stands for loan divided by value. Borrowing 95% leaves you with very little equity to start, and the lender sees that as a bigger risk. Many lenders apply Lenders Mortgage Insurance (LMI) above 80% LVR and/or set the loan price a bit higher for high LVRs.
LMI in a nutshell
LMI protects the lender, not you. It’s typically a single payment when you borrow over 80% of the property value; many borrowers add it to the loan.
The case to buy with 5% (when it makes sense)
1) You can purchase earlier, particularly under the Home Guarantee Scheme
The First Home Guarantee (FHG) under the federal Home Guarantee Scheme allows eligible buyers to purchase a home with as little as 5% deposit without having to pay LMI (the government guarantees part of your loan). You must still meet lender criteria and property caps/eligibility, but for those who qualify, the difference between 5% with no LMI and 5% with LMI is substantial.
2) Opportunity cost of waiting
When rents are high and you have a steady job, buying sooner can be a smart move. You begin to pay off your own home loan instead of your landlord’s. Some people find that homeownership’s discipline and potential long-term value growth outweigh the drawback of starting with little equity.
3) You hold onto cash
A smaller down payment can help you keep an emergency fund (3–6 months of expenses) to handle surprises; this proves useful in your first year as a homeowner when expenses pile up.
The downsides to the 5% (how you lose by it)
1) LMI may be very expensive
In addition to the FHG, an LMI premium at medium-to-high LVR can be anything from thousands to tens of thousands (exact amount will depend on loan size, LVR, the type of property and lender). You can calculate it by using Helia calculator and bypass the guessing. When you include LMI in the loan, you begin with even less equity from the beginning.
2) High-LVR loans are typically higher expenses
There is usually greater cost for 90–95% LVR finance than for ≤80% LVR loans. This means higher interest on a larger amount and takes effect in the first year of cash flow.
3) Stringent serviceability and stress testing
Banks are forced by APRA to verify if you will still be able to afford the loan when the rates jump by 3 points higher than your real rate (serviceability buffer). This protects you, though it reduces how much you will be able to finance and potentially reveals just how stretched your budget already is.
4) Negative equity risk
By only paying 5% (and LMI on the loan) at the start, a small fall in price, 3–5%, can eliminate your equity. You then end up in difficulty: you may find it more difficult to negotiate a better price by refinancing at a later time if your LVR is still above 80%, and selling may be a matter of needing other money to settle the loan. The RBA research connects low equity (high LVR) to the higher incidence of mortgage stress and paying arrears if times become bad.
“So… is 5% good or bad?”
It’s not good or bad, it involves give and take:
- Good when you steer clear of LMI through the FHG, have a steady income, and maintain a cash cushion, buying a prime location property you can hold onto as markets change.
- Risky when you shell out for LMI, face a steeper rate, and leave yourself with no safety net if your budget is already stretched thin.
Picture it as two different routes:
- 5% with Home Guarantee (no LMI) → smart move if you’re eligible.
- 5% with LMI → works for some buyers, but must be tested and aim to get under 80% LVR as soon as you can.
A quick real-world way to decide
Step 1: See if you qualify for the Guarantee first
If you’re buying your first home and meet the requirements, the First Home Guarantee could help you avoid the entire LMI cost. Your lender or broker can tell you about spot availability, limits, and timing.
Step 2: Calculate repayments using the APRA buffer
Take your quoted rate and build your budget at +3%. If your cash flow works at today’s rate but doesn’t work at +3%, you’re in a risky spot. Lenders already do this check; do it at home too, so you know what to expect.
Step 3: Figure out the “real cost” of a 95% loan
Check out:
- Interest rate at your LVR vs. the rate below 80%.
- LMI premium (if it applies): guess it (Helia’s calculator is a good place to start) and see how much your balance goes up if you add it to your loan.
Step 4: Set a goal to get below 80% LVR
Work to go under the 80% mark by making additional payments and using an offset account. This opens the door to refinancing at better rates in the future.
Step 5: Set aside emergency funds
Owning a home comes with unexpected expenses. Buying at 5% leaves you vulnerable if it uses up all your savings. Consider a smaller property, bargain harder, or hold off for now.
Example calculation
Let’s say you’ve got your heart set on a house that costs $700,000.
If you put down 5%, that’s $35,000. If you don’t meet the requirements for the FHG, your lender will ask you to get LMI. Based on your specific situation, LMI on a 95% LVR can cost you a lot; if you add it to your loan, your initial loan balance goes up by that amount. At the same time, your interest rate for a 95% loan might be more than what the lender charges for an 80% LVR loan. When you put these factors together, you’ll find that your money situation in the first year is tighter, and your actual LVR might start closer to 97–99% after you’ve added LMI to your loan. If the market falls by even a few percent, getting a new loan might be tough until you build up more equity. Now, if you’re eligible for the FHG, you avoid the LMI cost. Your payment still needs to pass the +3% buffer test, but not having to pay LMI gives you a much better starting point.
When a 5% deposit raises concerns
- The Guarantee doesn’t apply to you, the LMI cost is hefty, and you’re considering adding it to your loan just to make the numbers work.
- Your budget balances at current rates; a 3% increase would derail the plan.
- You’ll lack an emergency fund after closing.
- You’re reaching for a home in a limited market where selling might prove challenging.
Practical safeguards if you decide to proceed with 5%
- Check your money flow for the first 12 months: include rates, insurance, utilities, upkeep and a real-world expenses budget.
- Test at +3% and a short-term income hit (like a few weeks away from work).
- Don’t touch the safety net. If buying at 5% drains it, think about a cheaper purchase or holding off.
- Set up an offset and plan extra payments from the start. Keep an eye on your LVR each month.
- Stay away from new loans (cars, buy now pay later, big credit card debts) until you’re well under 80% LVR.
- Guard your earnings: Review your leave sick pay, and insurance coverage (income protection TPD) with your advisor.
- Pick a property you can keep: the spot, shape, and strata/body-corp health are key when you borrow a lot.
What regulators and banks are saying (and why it’s important)
- APRA: the serviceability buffer stays at +3% reminding us that lending standards aim to safeguard households and the system in a world with higher rates. The takeaway: prepare for a safety margin.
- RBA: late payments remain limited, but when borrowers face difficulties, it’s often due to a mix of tight cash flow and little or no equity; a danger more pronounced at high LVRs.
- Banks: standard LVR guides often point out that LVRs over 80% might require LMI and/or result in higher interest rates; an expense many homebuyers don’t account for.
A fast shopping checklist (keep this handy)
- Eligibility: Do I meet the requirements for the First Home Guarantee (5% with no LMI)?
- Cash flow: Can I handle payments at rate +3% and put aside some money each paycheck?
- LMI reality: If I’m paying LMI, have I calculated it (and how it affects capitalising it)?
- Plan B: If prices fall 5%, can I keep the property and still make payments?
- Refinance path: What’s my strategy to achieve ≤80% LVR (extra payments, offset)?
- Buffer: Have I set aside 3–6 months of living expenses after settlement?
- Property choice: Is the house easy to sell and comfortable to live in; good area, no obvious flaws, stable body corporate (if relevant)?
Questions people often ask
Q: Can I get a loan with 5% down and no LMI?: Sure, if you’re eligible for the First Home Guarantee and your bank offers it. You’ll still need to pass regular credit checks, stay within property limits, and show you can afford it.
Q: Will I always pay more with a 95% loan?: Yes, lots of banks charge higher interest for big loans, and without the Guarantee, you’ll pay LMI too. Make sure to look at the overall cost.
Q: What if I refinance down the road?: That hinges on your home’s value and your situation. If your loan-to-value ratio remains high or your paycheck changes, you might not qualify for a better deal for some time. Your best bet is to come up with a strategy to lower your LVR fast.
To sum up
A 5% deposit can work well if you meet the Home Guarantee criteria, pass a +3% stress test, and maintain a safety net. Without these, the mix of LMI, steeper rates and slim equity might put you at risk if things go south. Handle it like any major business choice: weigh the risks, create your safety margin, and plan a clear route to ≤80% LVR.
When you’re set, we can compare your numbers side by side (95% vs 10% vs 20% deposit), calculate LMI, and design a cash-flow strategy that holds up in real life.
Need help crunching the numbers for your situation? Set up a chat with us at Roger Boghani Tax & Business Services, we’ll guide you through your choices and assist you to pick an approach that matches your budget and aims.
This article provides general information and doesn’t constitute financial advice for individual circumstances. Consider your circumstances and seek professional guidance before taking action.
