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The news of government-backed schemes, like the Home Guarantee Scheme, allowing first-home buyers to purchase a property with just a 5% deposit is a genuine game-changer. For many, it pulls the dream of homeownership forward by years, removing two massive hurdles: saving a 20% deposit and paying for Lenders Mortgage Insurance (LMI). Skipping LMI alone is a material saving that can easily amount to $20,000–$30,000, so it’s easy to see why these schemes are so appealing.

But after the initial excitement fades, it’s important to look at the other side of the coin. A smaller deposit means a larger loan, and a larger loan has significant long-term consequences. The financial relief of avoiding LMI can be quickly overshadowed by the strain of higher monthly repayments and a staggering amount of extra interest paid over the life of the loan.

Let’s break down the real, long-term costs that you need to consider.

Higher Monthly Repayments

The most immediate difference you’ll feel is in your monthly budget. A smaller deposit directly translates to a larger mortgage, which means your principal and interest (P&I) repayments will be higher from day one.

In a country with high property values, this isn’t a minor detail. Taking on more debt can have a substantial impact on your cash flow.

Let’s look at an example:

Imagine you want to buy a home valued at $700,000.

(These figures assume a constant 5.5% interest rate over 30 years for comparison. In practice, most Australian home loans have variable rates, meaning these costs could fluctuate and the gap could become larger or smaller over time.)

The difference here is $597 every single month. That’s over $7,100 a year that is no longer available for bills, savings, or simply living your life. You need to be certain your budget can comfortably absorb this for decades to come.

The Long-Term Cost: Extra Interest

While the monthly pinch is noticeable, the true cost of a smaller deposit reveals itself over the full 30-year term of the loan. Because you’re borrowing more, you’re paying more interest. A lot more.

Using the same $700,000 property example with the same set of assumptions:

By starting with a 5% deposit instead of 20%, you would pay approximately $109,920 in extra interest over the life of the loan. That’s a huge sum that could otherwise be used for investments, retirement savings, or other financial goals.

The Hidden Risk: A Smaller Equity Buffer

Beyond the repayments, a smaller deposit means you start with less equity in your home. Equity is the portion of the property you actually own (the market value minus the loan amount). A low equity buffer makes you more vulnerable if property prices fall.

If the market takes a dip shortly after you purchase, you could find yourself in “negative equity”—a stressful situation where your loan is larger than the value of your home. A larger initial deposit provides a much-needed cushion against this risk.

It’s an Opportunity, not a Trap

This isn’t to say that low-deposit schemes are a bad idea. They are an incredibly valuable tool that will help thousands of Australians enter the property market when they otherwise couldn’t.

However, it’s an opportunity that must be approached with a clear understanding of the trade-offs. Before you jump in, you should:

1. Do the Maths: Use a mortgage calculator to model your own scenarios.
2. Stress-Test Your Budget: Can you genuinely afford the higher repayments, even if interest rates rise?
3. Consider the Risks: Are you comfortable starting with a smaller equity buffer?

The 5% deposit scheme opens the door to homeownership, but it’s important to understand the full picture. For professional advice tailored to your personal situation and help weighing up the pros and cons, don’t hesitate to get in touch with us.