What the 5% deposit scheme will really cost buyers

"Tag someone looking to buy their first home, because from October 1, every first homebuyer can get into their home with just a 5% deposit," Prime Minister Anthony Albanese said at a press conference in August.

The federal government has fast-tracked the expansion of its Home Guarantee Scheme (HGS) by three months. From October, Housing Australia says:

• No place limits: all Australian first homebuyers with a 5% deposit can apply.
• No income caps: higher-income earners will be able to access the scheme.
• Higher property price caps: raised to reflect today's housing market.

The scheme lets buyers purchase with just a 5% deposit and avoid lenders mortgage insurance (LMI), potentially saving up to $40,000.

Not everyone is cheering.

Joseph Daoud, mortgage broker and founder of It's Simple Finance, says while the LMI savings are real, stamp duty remains a major hurdle.

"The Prime Minister's comments haven't included one little thing," Daoud says.

"The maximum price caps are now higher than stamp duty concessions in every single state. So, it's not just the 5% deposit - it's the deposit plus stamp duty, which in most states is just as high as the deposit."

Raised caps vs state concessions

The higher price caps were meant to give buyers more breathing room in expensive markets.

Take Sydney, with a median home price close to $1.2 million, the old $900,000 cap often locked first homebuyers out of accessing the scheme.

Lifting it to $1.5 million looks generous on paper as it's well above the city's median.

The problem is state-run stamp duty concessions haven't kept up. In New South Wales, the full exemption only applies to homes up to $800,000, with partial concessions up to $1 million.

If you buy a home in NSW at the new $1.5 million cap, you'll need:

• 5% deposit: $75,000
• Stamp duty: about $67,000

Yes, you might save around $40,000 on LMI - but unlike LMI, which can be rolled into your loan and repaid over time, stamp duty is paid upfront.

Now you're looking at $142,000 - an unrealistic scenario for many first homebuyers.

Of course, NSW, being the second-most expensive market in the world, is an extreme example. But as the table below shows, the same is true across the states and territories:

How first homebuyers can save on both LMI and stamp duty

There is a way first homebuyers can dodge both LMI and stamp duty, even in New South Wales.

The irony is they would have to purchase under $800,000 - the same amount as the previous price cap and the very bracket many have already been squeezed out of.

That undermines the whole point of lifting the caps and scrapping income limits, which were set at $125,000 for singles and $200,000 for couples.

While this was supposed to help higher earning first homebuyers compete in more expensive markets, they may be priced out all the same.

Opinions split on First Home Guarantee

Stamp duty aside, industry groups have broadly welcomed the changes.

Both mortgage broking associations - the Finance Brokers Association of Australia Limited (FBAA) and the Mortgage and Finance Association of Australia (MFAA) - say the expansion would help first homebuyers access a wider range of lenders and better navigate their options.

"We welcome the broadening of lenders, including smaller, customer-owned and regional banks," says MFAA CEO Anja Pannek. "It's crucial that the scheme operates with lenders who partner with mortgage brokers."

Mortgage brokers already facilitate most scheme places, with 77% of HGS loans coming through brokers in the last financial year, according to Housing Australia.

FBAA managing director Peter White agreed: "First home buyers may not be aware that there are many lending options available and while the big banks offer solid products, they are not always the best option for every buyer."

"Do your homework and consider what is best for you in terms of rate, terms and the way the loan is structured."

The Australian Banking Association also backed the scheme, with CEO Simon Birmingham calling it a 'welcome boost" for many first homebuyers.

But this "boost" is exactly what some critics are worried about.

A review by Lateral Economics estimated the expansion of the HGS could push up home prices by as much as 10%, as more buyers compete for a limited number of properties.

The government disputes this, pointing to Treasury modelling that forecasts a far smaller impact - just 0.5% over six years.

But even a modest rise comes with another risk: first homebuyers taking on bigger loans and heavier repayments.

As Dale Gillham, analyst with Wealth Within warned, the scheme isn't a housing dream, but a "debt trap dressed as policy".

"If you're going to take advantage of this scheme, don't treat it like a once in a lifetime sale. This is your first rung on the ladder, not the dream home that bleeds you dry. Buy conservatively, leave a buffer, and avoid maxing out your borrowing," he wrote in Money.

"History is clear: in every bubble, it's the overleveraged who get crushed first. Don't be one of them. This isn't the season for FOMO, it's the season for caution."

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