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Can You Buy a House With a 5% Deposit in Australia?
Introduction
Yes, it is possible to buy a house in Australia with a 5% deposit, although doing so usually means paying Lenders Mortgage Insurance (LMI) and taking on higher monthly repayments. While many lenders prefer a 20% deposit to reduce risk and avoid LMI, smaller deposits are increasingly common, particularly among first-home buyers using government support schemes. The trade-off is that borrowing more money means higher interest costs over the life of the loan.
Key points:
- It is possible to buy a home in Australia with a 5% deposit
- Most lenders prefer a 20% deposit to avoid Lenders Mortgage Insurance
- A smaller deposit means higher monthly repayments and more interest over time
- Government schemes allow some buyers to purchase with 5% deposits without paying LMI
What is the minimum deposit needed to buy a house?
Technically, the absolute minimum deposit required by most lenders is around 5% of the property price.
For example:
| Property Price | 5% Deposit | 20% Deposit |
| $600,000 | $30,000 | $120,000 |
| $800,000 | $40,000 | $160,000 |
| $1,000,000 | $50,000 | $200,000 |
A deposit smaller than 20% usually means the loan has a loan-to-value ratio (LVR) above 80%, which is when lenders typically require Lenders Mortgage Insurance (LMI).
Some lenders may allow deposits slightly below 5% in exceptional cases, but these arrangements are rare and usually require strong income, guarantors, or special programs.
If you’re researching your first property purchase, our guide to first home loans in Australia explains how deposits, borrowing power and government schemes work together.
The downside of buying with a small deposit
Buying with a smaller deposit allows you to enter the property market sooner, but it also increases the amount you borrow. Borrowing more money means higher repayments and greater interest costs over time.
In practical terms, a smaller deposit can lead to:
- higher monthly mortgage repayments
- more interest paid over the life of the loan
- potential Lenders Mortgage Insurance costs
For many buyers, the main trade-off is between getting into the market earlier and paying more over time.
Example: 5% deposit vs 20% deposit
Consider a home purchase of $800,000 with a 30-year loan at an interest rate of 6%.
With a 20% deposit:
Deposit: $160,000
Loan size: $640,000
Approximate monthly repayment: $3,837
Total interest over 30 years: about $741,000
With a 5% deposit:
Deposit: $40,000
Loan size: $760,000
Approximate monthly repayment: $4,556
Total interest over 30 years: about $880,000
The difference:
Buying with a 5% deposit in this example means paying roughly $719 more per month in repayments and about $139,000 more in interest over the life of the loan. In many cases, buyers may also need to pay Lenders Mortgage Insurance, which can add several thousand dollars to the upfront cost of the loan.
These figures illustrate why many financial advisers recommend saving a larger deposit if possible.
Government schemes that allow 5% deposits
To help more Australians enter the housing market, the government has introduced several programs that allow eligible buyers to purchase a home with smaller deposits while avoiding LMI.
These include the Home Guarantee Scheme, which contains several initiatives:
- First Home Guarantee
- Regional First Home Buyer Guarantee
- Family Home Guarantee
Under these programs, the government effectively guarantees part of the loan, allowing eligible buyers to purchase with deposits as low as 5% without paying Lenders Mortgage Insurance.
The intention is to help first-home buyers who have reliable incomes but struggle to save large deposits in a rising property market.
Why the government allows smaller deposits
Property prices in Australia have risen significantly over the past several decades, making it increasingly difficult for younger buyers to save large deposits.
Policies allowing smaller deposits aim to help first-home buyers enter the market sooner and reduce the barriers created by rising housing costs. Supporters argue these programs create opportunities for households who might otherwise remain renters for many years, while critics sometimes suggest they risk adding further demand to an already competitive housing market.
Rent versus buying
One way to evaluate whether buying makes sense is to compare mortgage repayments with current rent.
If mortgage repayments are close to, or only slightly higher than, what you currently pay in rent, some buyers decide purchasing may be worthwhile—particularly if they expect to stay in the property for several years.
However, owning a home also involves additional expenses beyond the mortgage. These may include:
- property maintenance
- council rates
- home insurance
- stamp duty and legal fees
These costs should be carefully considered before deciding whether to buy.
Should you wait and save a bigger deposit?
Saving a larger deposit can significantly reduce borrowing costs. A 20% deposit removes the need for Lenders Mortgage Insurance and lowers the total amount borrowed, which reduces both monthly repayments and interest over the life of the loan.
However, waiting longer to save also means remaining in the rental market while property prices may continue to rise. For many buyers, the decision ultimately depends on their income, their savings rate, and the property market conditions in their area.
Frequently asked questions
Yes. Many lenders allow buyers to purchase with a 5% deposit, although Lenders Mortgage Insurance usually applies unless the buyer qualifies for a government scheme.
Yes. Even if you have a 5% deposit, lenders still assess your income, employment stability, debts, and living expenses. If the bank believes you may struggle to meet repayments, the loan application can still be declined.
Sometimes. Loans with smaller deposits are considered higher risk by lenders, and some banks charge slightly higher interest rates for loans with a high loan-to-value ratio (LVR).
Many lenders require evidence of genuine savings, meaning you have saved money consistently over several months. This helps demonstrate that you can manage regular loan repayments.
Some lenders allow a family guarantor loan, where a parent or close relative uses equity in their property as security. This can reduce or eliminate the need for a deposit and may also avoid Lenders Mortgage Insurance.
Yes. In some cases, buyers may combine a 5% deposit with government grants or concessions, which can reduce upfront costs such as stamp duty or increase the funds available for the purchase.
Often they do. Buyers usually need additional funds for stamp duty, legal fees, inspections, and moving costs, which can add thousands of dollars to the total amount needed upfront.
Refinancing may be more difficult initially because the loan balance is high relative to the property value. Many borrowers wait until their loan-to-value ratio falls below 80% before refinancing.
This depends on both property price growth and how quickly the loan is repaid. In rising markets, equity may build relatively quickly, but in slower markets it can take several years for the loan-to-value ratio to fall below 80%.
