Can I buy a house with a 5 per cent deposit?

Buying with a 5 per cent deposit is more achievable than many people think, especially for first home buyers. The key is understanding the two main paths to it and which one suits you, because they differ in cost. Here is how a 5 per cent deposit purchase actually works.

The short answer

Yes, you can often buy a house with a 5 per cent deposit. There are two main ways: using an eligible government guarantee so no Lenders Mortgage Insurance is charged, or borrowing from a lender that accepts a 5 per cent deposit and paying the insurance premium. Both get you in with a smaller deposit, but the cost differs.

The First Home Guarantee path

For eligible first home buyers, the First Home Guarantee is usually the better path. The government guarantees part of the loan, up to 15 per cent of the property value, so the lender does not require Lenders Mortgage Insurance even though your deposit is only 5 per cent. That avoids the premium entirely, which is a significant saving. Price caps and eligibility rules apply, and you apply through a participating lender or broker.

The standard path with insurance

If you do not qualify for a guarantee, some lenders will still lend with a 5 per cent deposit, but they generally charge Lenders Mortgage Insurance because your loan to value ratio is 95 per cent. The premium can be sizeable at that level and is usually added to the loan, so you pay interest on it. It is still a valid path, it just costs more than a guarantee.

You still need genuine savings

Even with a 5 per cent deposit, many lenders want to see that some of it is genuine savings, money built up over time rather than only a recent gift. The usual guide is savings over around three months. A family gift can often still be used, but lenders may treat it differently, so check the policy before relying on it.

Budget for costs on top

A 5 per cent deposit is the deposit, not the total cash you need. You also generally need funds for purchase costs such as stamp duty where it applies, legal fees, inspections and loan fees. With a smaller deposit these costs matter more, because you have less buffer, so plan for them carefully.

A smaller deposit means a larger loan

Buying with 5 per cent means borrowing 95 per cent, so your loan is larger and your repayments higher than with a bigger deposit. Lenders will still assess that you can service the larger loan, stress tested above the actual rate, so a small deposit does not remove the need to show you can afford the repayments.

When buying sooner is worth it

The advantage of a 5 per cent deposit is getting into the market sooner, which can be worth a lot if prices and rent are rising. The trade off is a larger loan and possibly an insurance premium. Whether that trade off is worth it depends on your circumstances and the market, so it is worth weighing rather than assuming.

Work out your best route

Because the guarantee path and the insurance path differ in cost and eligibility, the useful step is to find which applies to you. A broker can check whether you qualify for a guarantee, compare lenders that accept a 5 per cent deposit, and tell you the genuine cost of each route, usually at no cost to you.