For many Australians the deposit is the biggest barrier to buying a first home. The Australian Government 5% Deposit Scheme — formerly known as the First Home Guarantee — allows eligible first home buyers to purchase with a deposit as small as 5% without paying Lenders Mortgage Insurance. The scheme was significantly expanded from 1 October 2025, removing income caps and annual limits on places. This article explains how the scheme works, what changed in 2025, the property price caps that apply and the genuine trade-offs of buying with a small deposit.
Source note: all scheme details in this article have been verified against Housing Australia's official communications at housingaustralia.gov.au and the government's dedicated scheme portal at firsthomebuyers.gov.au and are stated as at June 2026. Scheme rules can change — always verify current details at those official sources before relying on any particular condition.
How the Scheme Works
Under the Australian Government 5% Deposit Scheme, the federal government — through Housing Australia — provides a guarantee to a participating lender covering part of the loan. The guarantee replaces the function that Lenders Mortgage Insurance (LMI) would otherwise perform: it gives the lender comfort against a portion of potential loss if the borrower defaults.
The practical effect for the buyer is that they can borrow up to 95% of the property's value using a deposit as small as 5%, without being charged LMI. LMI is typically a substantial cost — often tens of thousands of dollars on a high loan-to-value ratio loan — so avoiding it can represent meaningful upfront savings.
Critically, the guarantee is not a grant. The government does not contribute to the purchase price, pay down the loan or supplement the deposit. It is a credit guarantee issued to the lender. The buyer still takes on a 95% loan, pays full interest on the entire balance and bears full repayment responsibility.
What Changed From 1 October 2025
The October 2025 expansion was the most significant change to the scheme since its launch. Three major restrictions were removed simultaneously.
Income caps abolished. Before 1 October 2025 the scheme was limited to singles earning less than $125,000 and couples with a combined income below $200,000 per year. Those limits were removed entirely. As at June 2026 there is no income threshold — eligibility does not depend on how much a buyer earns. Verified via Housing Australia's official announcement (housingaustralia.gov.au).
Annual place limits removed. The previous scheme was capped at 35,000 guarantees per year, which meant places ran out and applicants had to wait for the next financial year's allocation. That cap has been abolished. Every eligible applicant can now access the guarantee — there is no annual quota and no waiting list based on places.
Property price caps raised. The maximum purchase price that qualifies for the guarantee was increased across all states and regions. The caps are location-specific — they vary between capital cities, regional centres and regional areas within each state. For example, as at October 2025, the cap for Sydney, Newcastle, Illawarra and Lake Macquarie rose to $1,500,000; Melbourne and Geelong to $950,000; Brisbane and key regional centres to $1,000,000. These specific figures have been verified via Housing Australia's media release of October 2025 (housingaustralia.gov.au).
The current cap for any specific location can be checked using the postcode search tool at firsthomebuyers.gov.au. Buyers should use that tool for their specific postcode rather than relying on the state-level summaries above, since caps differ within states.
Property Price Caps: Selected Regions (as at June 2026)
| State / Region | Cap (as at June 2026) | Source |
|---|---|---|
| NSW — Sydney, Newcastle, Illawarra, Lake Macquarie | $1,500,000 | Housing Australia, Oct 2025 |
| NSW — Rest of state | $800,000 | Housing Australia, Oct 2025 |
| VIC — Melbourne, Geelong | $950,000 | Housing Australia, Oct 2025 |
| VIC — Rest of state | $800,000 | Housing Australia, Oct 2025 |
| QLD — Brisbane, Gold Coast, Sunshine Coast, key regional centres | $1,000,000 | Housing Australia, Oct 2025 |
| QLD — Rest of state | $800,000 | Housing Australia, Oct 2025 |
| WA — Perth, key regional centres | $800,000 | Housing Australia, Oct 2025 |
| SA — Adelaide, key regional centres | $800,000 | Housing Australia, Oct 2025 |
| TAS, ACT, NT | Location-specific — check the postcode tool | firsthomebuyers.gov.au |
Both the purchase price and the lender's assessed value of the property must be at or below the applicable cap. If the lender's valuation comes in below the contract price, the lower figure applies. Verify the current cap for your specific postcode at firsthomebuyers.gov.au before exchanging contracts — caps can be updated.
Who Counts as a First Home Buyer
Eligibility turns primarily on prior property ownership, not simply whether the applicant has previously bought a home.
The general test: the applicant (and any co-applicant) must not have previously owned a property in Australia that was their principal place of residence. Prior ownership of an investment property that was never occupied as a home does not automatically disqualify an applicant from the scheme's current rules.
Additional conditions as at June 2026 (verified via firsthomebuyers.gov.au and Housing Australia):
- Australian citizen or permanent resident, aged 18 or over.
- Purchasing as an owner-occupier — the property must become the applicant's principal place of residence within a specified period of settlement (typically six months).
- Deposit of at least 5% in genuine savings or eligible equivalents, as assessed by the participating lender.
- Purchase price at or below the location-specific property price cap.
- Application must be made through a participating lender (a defined panel — it is not available through all lenders).
The prior ownership test covers interests in real property in Australia, including land and company title interests. Applicants who previously owned property overseas but not in Australia are not disqualified on that basis alone. Applicants who held a minor interest in a property (such as inheriting a small share) should check the specific eligibility criteria carefully.
LMI vs the Guarantee: What the Difference Actually Is
Lenders Mortgage Insurance is a policy that protects the lender, not the borrower, against loss if the borrower defaults and the property sells for less than the outstanding loan. It is triggered when the loan-to-value ratio exceeds 80%. The premium is paid by the borrower as an upfront cost (or capitalised into the loan), but the beneficiary is the lender.
The government guarantee replaces LMI in its role as a credit risk mitigant for the lender. The lender is still protected — the government's guarantee covers part of the potential shortfall in a default scenario. The borrower pays no LMI premium. What the borrower does not escape is the underlying financial exposure: a 95% LVR loan is still a 95% LVR loan, with the risks that entails.
After the guarantee is issued, it operates in the background. The borrower makes repayments to the participating lender in the normal way. If the borrower later refinances or switches lenders, the guarantee may not transfer — this is worth clarifying with the lender at the time of application.
The Real Trade-Offs of a 5% Deposit
Avoiding LMI is a genuine saving. Entering the market sooner — before a deposit goal is reached — can also have value in a rising market. But a small deposit carries real financial risks that are worth understanding clearly before committing.
A larger loan means more interest over time. A buyer who purchases with a 5% deposit borrows 90 cents for every dollar of property value, compared to 80 cents with a 20% deposit. The difference in total interest paid over a 25 or 30 year loan term is substantial. The monthly repayment is also higher, which reduces financial flexibility.
Negative equity risk in a falling market. With a 95% loan, property values only need to fall 5% before the loan balance exceeds the property's worth. In that situation the borrower is in negative equity — they cannot sell the property without making up the shortfall from other funds, and refinancing becomes difficult. Markets have periods of decline in every state, and the risk is not hypothetical.
Limited buffer for unexpected costs. A buyer who has saved exactly the minimum deposit has little cash reserve for the costs that arise after purchase: maintenance, rates, insurance, body corporate levies, unexpected repairs. Running close to the financial minimum on both deposit and cash reserves increases vulnerability to financial stress.
Higher serviceability pressure. Lenders assess borrowers against a stressed interest rate buffer above the actual rate (APRA requires a minimum 3% buffer). A larger loan produces a higher stressed repayment figure, which can affect how much borrowing power remains for other needs.
These are not arguments against using the scheme — they are features of a high-LVR loan that exist regardless of whether LMI or a government guarantee is used. A buyer who would otherwise be in a 95% LVR loan with LMI is broadly in the same financial position under the guarantee, except with lower upfront costs.
Participating Lenders
The scheme operates through a panel of participating lenders approved by Housing Australia. Lenders apply to be part of the panel and must meet Housing Australia's requirements. The panel includes major banks and a range of smaller lenders.
Participating lender names are published at firsthomebuyers.gov.au. Not all lenders offer the scheme, and lenders set their own interest rates, fees and credit criteria for scheme loans. The guarantee does not standardise rates — a buyer applying through two different participating lenders may receive different rate offers. Comparing options across the panel is worthwhile.
State Government First Home Schemes
The Australian Government 5% Deposit Scheme is a federal programme. Most states also operate their own first home programmes, which may include stamp duty concessions, grants, shared equity schemes and subsidised loans. These state programmes operate independently of the federal scheme and have their own eligibility conditions and price limits.
Eligibility for the federal guarantee does not confer automatic eligibility for any state scheme, and vice versa. For state-specific concessions and grants, check the relevant state or territory revenue office directly — the table in the companion article on stamp duty across Australia links each jurisdiction's revenue office.
Checking Your Eligibility
The free First-Home Scheme tool at lenderbridge.com.au/fhb-scheme provides an indicative summary of whether the Australian Government 5% Deposit Scheme and related state programmes may apply to a buyer's situation. The tool is indicative only and does not constitute a formal eligibility assessment — that assessment is made by the participating lender at the time of application.
Frequently Asked Questions
What changed about the First Home Guarantee in October 2025?
From 1 October 2025 the scheme was significantly expanded. Income caps were removed entirely (the previous $125,000 single / $200,000 couple limits no longer apply). The annual cap on places was abolished — the scheme is now open to every eligible applicant. Property price caps were raised across all states and regions. The scheme was also renamed the Australian Government 5% Deposit Scheme. Source: Housing Australia (housingaustralia.gov.au).
Can someone who previously owned an investment property use the scheme?
It depends on the nature of that ownership. The scheme generally requires that the applicant has not previously owned a property in Australia that was their principal place of residence. Prior ownership of an investment property that the applicant never occupied as a home is not automatically disqualifying under the scheme's rules, but applicants should verify their specific circumstances against the current eligibility criteria at firsthomebuyers.gov.au.
Does the scheme mean a 5% deposit is enough to buy any property?
No. The scheme allows eligible buyers to purchase with a 5% deposit without paying Lenders Mortgage Insurance, but the purchase price must be at or below the property price cap for the relevant location. The cap varies by state and region. Check the current cap via the postcode search tool at firsthomebuyers.gov.au before relying on any headline figure.
What are the real risks of buying with a 5% deposit?
A 5% deposit means a 95% loan-to-value ratio. The borrower carries more debt, pays more interest over the life of the loan and has less equity buffer if property values fall. In a declining market a buyer who purchased at 95% LVR can find themselves in a negative equity position, meaning the property is worth less than the outstanding loan. Repayments are also higher because the loan is larger. The scheme removes the LMI cost, but it does not remove these underlying financial risks.
General information only, not credit assistance or financial product advice. LenderBridge connects borrowers and lenders; it does not advise or recommend. Check figures with your lender and the official source.