How does buying a home with a 5% deposit compare to a 20% deposit?

Government initiatives such as the First Home Loan Deposit Scheme (FHLDS) and New Home Guarantee (NHG) are helping Australians buy their first home sooner with a smaller deposit. But is it better to enter the market as soon as you can, or hold off until you’ve saved at least 20%?

House prices around the country have seen exponential growth over the past 12 to 18 months. But with the Australian Government’s first home buyer initiatives aiming to help many Australians overcome this hurdle by guaranteeing up to 15% of their mortgage, buyers may be approved for a loan after saving just 5% of the purchase price.

This means, for example, that if a Sydney buyer wanted to buy an $800,000 home with the help of the FHLDS, they would only be required to save a deposit of $40,000, instead of waiting until they’ve saved a standard 20% deposit of $160,000. By guaranteeing the remaining 15%, the scheme allows the buyer to avoid paying substantial Lender’s Mortgage Insurance costs.

However, because buying a home with a smaller deposit means taking on a larger loan amount, it’s important to weigh up what this could mean in the long term – along with a number of other considerations.

Buying a home with a 5% deposit

The main advantage of buying a home with a 5% deposit is that it cuts down the time it would take to save a larger deposit, giving buyers the opportunity to enter the property market sooner. This means avoiding the generally likely chance of house prices rising over time and in turn increasing the deposit and loan amount required to purchase a home.

It also means, for those buyers who are currently renting, that instead of having to continue to pay rent while saving for a larger deposit, you’ll be able to use those payments to begin paying off your mortgage.

On the other hand, there are a number of disadvantages that should be considered. For instance, there are restrictions that must be adhered to when it comes to using a government scheme to help buy your first home. These include property price caps based on the property’s location, and a limited list of participating lenders with whom you must take out your mortgage.

Additionally, if for any reason you find yourself needing to sell or move out of your property before you’ve built up at least 20% equity, then you may no longer be guaranteed under the relevant scheme and may be required to take certain actions like paying fees and charges or taking out Lender’s Mortgage Insurance.

Lastly, but certainly not least, is that a smaller deposit means a larger loan amount, likely resulting in more expensive repayments and generally higher interest charges over the life of the loan.

Buying a home with a 20% deposit

In contrast, buying a home with a 20% deposit means that your loan amount will be smaller, your regular repayments will generally be more affordable, and your total interest charges will likely be lower.

This, of course, comes at the cost of having to save a larger amount of money and delaying your entry into the property market. But there is a raft of other advantages to buying your first home with a standard 20% deposit and avoiding government schemes.

For instance, you’ll likely have a wider choice of lenders to choose from when it comes to selecting the best mortgage for your circumstances, as you won’t be restricted to a list of participating lenders, and many allow borrowers to borrow up to 80% of the purchase price.

You’ll also have flexibility around the purchase price of the home you want to buy, as you won’t be required to adhere to price cap restrictions. While it’s still important to stick to your budget, a small amount of flexibility might be just what you need to secure the home you want.

Finally, because you’re starting your mortgage term with 20% equity in the property, you’ll continue to build on this as you make your repayments, and typically have the opportunity to refinance whenever you see fit.

How the numbers stack up

To give you an idea of what your repayments could look like on a mortgage with a 5% deposit compared to a 20% deposit, we’ve crunched the numbers based on the price caps (effective 1 July 2022) for the FHLDS in each of Australia’s capital cities.

Average monthly repayments on home loans with 5% deposit and 20% deposit

Source: nhfic.gov.au, RateCity.com.au Note: Based on a CBA 5% deposit rate of 2.99%, and 20% deposit rate of 2.29%, over a 360 month loan term.

While it’s important to take into account the difference a smaller deposit will have on your mortgage repayments, it’s especially important to consider how they will increase when interest rates rise – particularly at a time when rates are forecast to rise in the coming months and continue to do so into the next year or so.

Consider using RateCity’s home loan repayment calculator to see how much your mortgage repayments could cost you.

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