First Home Guarantee vs saving a 20% deposit

The two paths, stated plainly

One path is to buy now with a 5% deposit under the Australian Government 5% Deposit Scheme, where Housing Australia guarantees up to 15% of the property value and you pay no Lenders Mortgage Insurance. The other is to keep saving until you hold 20%, which avoids LMI on ordinary lending without needing any scheme at all.

This is usually framed as a question about LMI. It is really a question about time. The 20% path costs you however long it takes to save the difference, during which prices, rates, rents and your own circumstances all move. The 5% path costs you a larger loan and higher repayments from day one.

What the scheme is now, which is not what most guides say

The scheme was renamed from the First Home Guarantee on 1 October 2025, and the same change removed both the income tests and the 35,000-place annual cap. There is no quota to compete for, no waitlist, and no income ceiling. A great deal of published material still describes the old $125,000 single and $200,000 joint caps as current, and a buyer who rules themselves out on that basis is wrong about their own eligibility.

What still binds is the property price cap, which varies by state and by whether the property sits in a capital city or a designated regional centre. Single parents and single legal guardians need only a 2% deposit. You cannot apply to Housing Australia directly; participation runs through one of more than thirty participating lenders.

The arithmetic that actually decides it

Compare the cost of waiting against the cost of the larger loan, on your own numbers rather than in the abstract. The cost of waiting is rent paid over the saving period plus any price movement against you. The cost of buying now is the extra interest on a larger balance, plus the risk of holding a high loan-to-value ratio.

The current market matters here and points against the usual urgency framing. Cotality recorded a fifth consecutive monthly national fall in August 2026, with values about 3.6% below the March 2026 peak. Waiting has not been penalised by price growth recently, which weakens the strongest historical argument for entering early. That could change, which is the point: nobody should treat either direction as settled.

The risk nobody puts in the brochure

Buying at 95% loan-to-value in a falling market means a modest decline puts you in negative equity, where the loan exceeds the property value. That is survivable if you hold and keep paying, and it is genuinely painful if you need to sell or refinance in the meantime.

The scheme removes the LMI premium; it does not remove that exposure. A buyer choosing the 5% path should be confident about staying put for a reasonable period, and should be honest with themselves about how secure their income is over that horizon.

Where the paths are not actually alternatives

For many buyers the choice is not real. If saving 20% on a $700,000 purchase means finding another $105,000 while paying rent, the honest timeline may be years rather than months, and the comparison is between buying now and buying much later rather than between two similar dates.

It also is not a binary. A 10% or 15% deposit outside the scheme, with a reduced LMI premium, sits between the two and is often the better answer for someone partway there. LMI steps at loan-to-value band edges rather than tapering, so the last few thousand dollars of deposit before a band edge are worth far more than the first.

Getting a real answer

The inputs that decide this are your borrowing capacity assessed at the 3 percentage point serviceability buffer, the price cap for where you are buying, your genuine savings position, and how a particular lender treats your income. Those are file-specific and no page can resolve them.

Azure Home Loans can model both paths against your actual numbers and confirm scheme eligibility with participating lenders. Treat the comparison above as orientation rather than a recommendation for your circumstances, and confirm current scheme rules on the federal government site before you rely on them.

FAQ

Is there still a limit on places in the 5% deposit scheme?

No. The 35,000-place annual cap was removed on 1 October 2025, along with the income tests. There is no quota to compete for and no waitlist. Property price caps still apply and vary by state and by whether the property is in a capital city or a designated regional centre.

Do I still pay LMI with a 5% deposit under the scheme?

No. Housing Australia guarantees up to 15% of the property value, which is what removes the Lenders Mortgage Insurance premium a 95% loan would ordinarily attract. You still pay all the other purchase costs, including duty where it applies, legal fees, inspections and moving costs.

Is it better to buy with 5% now or wait and save 20%?

It depends on how long saving the difference would actually take and what happens to prices meanwhile. Buying now costs more in interest on a larger loan; waiting costs rent and any price movement against you. With national values down about 3.6% from the March 2026 peak, waiting is not currently being penalised by price growth.

What income do I need to qualify?

There is no longer an income cap on the scheme itself, so eligibility on income comes down to whether a lender will approve the loan. That is assessed at your rate plus a 3 percentage point buffer, so borrowing capacity is usually the binding constraint rather than any scheme threshold.

Can I use the scheme on any property?

Only up to the price cap for your location, and the property must meet the scheme criteria. Caps are higher for capital cities and designated regional centres than for the rest of each state, and the designated regional centres are a short list rather than anywhere outside a capital.

What happens if my property falls in value after I buy at 95%?

You can end up in negative equity, where the loan exceeds the value. That matters little if you hold the property and keep paying, and a great deal if you need to sell or refinance. It is the main risk of a low-deposit purchase and the scheme does not remove it.

How do I apply for the scheme?

Through one of the thirty-plus participating lenders, not directly to Housing Australia. A broker can confirm which participating lenders suit your circumstances, since lender policy on income type, employment history and genuine savings varies and the scheme does not override it.