Can I get a home loan with a 5% deposit?
Yes, you can get a home loan with a 5% deposit. Without a government guarantee scheme, most lenders will require you to pay Lenders Mortgage Insurance (LMI), which can cost $15,000–$30,000 or more on a typical Illawarra purchase. Eligible first home buyers can use the First Home Guarantee to borrow with 5% and avoid LMI entirely.
The Fuller Picture
A 5% deposit is enough for most lenders to assess your application, but it changes the terms significantly. With less than 20% of the purchase price saved, you are borrowing above an 80% loan-to-value ratio (LVR), and lenders treat that as higher risk. Their response is to require Lenders Mortgage Insurance — a one-off premium that protects the lender, not you, if you default. That cost gets added to your loan, meaning you borrow more and pay interest on it over the life of the loan.
The main exception is the First Home Guarantee (previously the First Home Loan Deposit Scheme), which lets eligible buyers purchase with a 5% deposit while the federal government guarantees the remaining 15% to the lender. Because the lender sees 20% coverage in total, they waive LMI. Places are limited each financial year and income caps apply. There is also the Regional First Home Buyer Guarantee and the Family Home Guarantee, which allows single parents to buy with as little as 2%.
Outside of government schemes, a guarantor loan is another path. If a parent or close family member agrees to put their own property up as additional security, some lenders will accept a 5% deposit without LMI, because the combined security reduces the effective LVR below 80%. Each lender has different rules around who qualifies as a guarantor and how much of the loan can be covered.
What This Means for Your Purchase
If you are going in with a 5% deposit and no access to a government scheme or guarantor, you need to factor LMI into your budget before you start bidding. On a $750,000 purchase with a $37,500 deposit, LMI can run to $20,000–$28,000, which gets capitalised into your loan. Your actual loan amount is not $712,500 — it is closer to $735,000 or more, and you pay interest on that difference for the full loan term.
There is also a lender-selection issue. Not all lenders accept a 5% deposit for every property type. Units in high-density developments, properties in coastal or regional locations, and anything with non-standard construction can attract tighter LVR restrictions. Some lenders cap their lending at 80% LVR for these property types, meaning a 5% deposit simply will not be enough regardless of your income.
Timing matters too. Some lenders charge slightly higher interest rates for high-LVR loans, particularly when LMI is involved. Comparing the total cost of buying now versus saving further can sometimes reveal that a short wait produces a meaningfully better financial position — especially if property prices in your target area are not moving quickly.
How This Shows Up in the Illawarra
In the Illawarra, entry-level houses in Wollongong, Shellharbour, and the northern suburbs typically start at $700,000–$850,000. On a $750,000 purchase, a 5% deposit is $37,500. That is achievable for many buyers who have been saving steadily. The complication is that LMI at those price points is not trivial — it commonly falls in the $18,000–$28,000 range and gets added to a loan you are already stretching to service.
First home buyers using the First Home Guarantee have been active across the Illawarra, particularly for properties priced under the NSW cap. Units and townhouses in suburbs like Fairy Meadow, Warrawong, Dapto, and Shellharbour Village have been common entry points. The scheme has limited places each year and properties must meet the applicable price threshold, which for NSW was $900,000 as of the most recent allocation round. Checking eligibility before you start bidding avoids a costly surprise at contract stage.
Frequently Asked Questions
Will every lender accept a 5% deposit?
Not all will. Most major banks and many non-bank lenders do accept 5% deposits, but some apply restrictions based on property type, postcode, or loan purpose. Units in high-density buildings, unusual construction types, and certain regional postcodes can face tighter LVR requirements from specific lenders.
What is the difference between a 5% deposit and a genuine savings requirement?
Some lenders require that part of your deposit come from genuine savings — money held in your account for at least three months. A gift from parents, a tax refund, or a lump-sum bonus may not count unless it has been sitting in your account long enough to satisfy the lender's policy. Check with your broker before assuming all your funds qualify.
Can a first home buyer combine the 5% deposit scheme with stamp duty exemptions?
Potentially yes. First home buyers in NSW may qualify for both the First Home Guarantee (5% deposit, no LMI) and a stamp duty exemption or concession under the First Home Buyer Assistance Scheme. The two operate independently, so you need to check eligibility for each one separately.
How long does it take to save a 5% deposit for an Illawarra property?
At typical Illawarra entry-level prices around $700,000–$800,000, a 5% deposit is $35,000–$40,000. For most buyers saving consistently, that is 12–24 months depending on income, rent, and living costs. You will also need funds for stamp duty and purchase costs unless you are fully exempt as a first home buyer.
Does LMI protect me as a buyer?
No. LMI protects the lender, not you. If you default and the property sells for less than you owe, the insurer covers the lender's shortfall. You remain responsible for any remaining debt. Despite the name, LMI provides no protection for your equity or your financial position.
Can a buyers agent help when I am buying with a 5% deposit?
Yes. A buyers agent can help you identify properties that fit your real budget including LMI costs, steer you away from property types that may not meet lender LVR requirements, and negotiate strongly on your behalf. When you are buying at the edge of your borrowing capacity, overpaying or choosing the wrong property type can have significant consequences.
If you are buying with a smaller deposit and want to make sure you are not paying more than you need to, we can help you think through the options before you commit. Reach out to The Shoreline Agency and we will work through your situation with you.
