As a Melbourne-based licenced real estate professional, I often get asked by aspiring homeowners, “Is it really possible to buy home with 5% deposit?” The short answer is, YES! However, as with most things in real estate, the full story is quite nuanced.
With housing affordability becoming a major problem across Melbourne, property prices are skyrocketing. It’s making it harder for people to enter the property market.
Let’s face it. Real estate is a time-sensitive market where every second an opportunity gets lost. However, the biggest hurdle between home buyers and their dream home is the hefty 20% deposit that may even surpass people’s annual income. But what if you could put down only a 5% deposit and become a homeowner? Let’s find out.
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Your Guide to Buying Home with 5% Deposit
What difference does a 5% deposit make?
Imagine you want to buy a home that costs AUD $800,000. The minimum deposit required by the lender is 20% of the property value. That means you must have one-fifth of the property price upfront before you even consider buying that house. For the above-mentioned property, the deposit comes to around AUD $160,000. It’s way higher than the median income in Melbourne, Victoria which is approximately AUD $56,000. Therefore, procuring such a hefty amount can be difficult for many.
However, a 5% deposit on the property requires you to put down AUD$40,000, which is one-fourth of the deposit you would have paid otherwise. This stark difference makes the 5% deposit option very lucrative. So, how can you buy home with 5% deposit? Let’s find out.
What are the government schemes that allow buyers to purchase property at 5% deposit?
There are many government initiatives that allow first time home buyers and buyers that satisfy certain criteria to purchase property. These govt schemes primarily include grants or guarantees that help to significantly reduce the deposit amount, such as:
First Home Guarantee (FHBG)
As a part of the Home Guarantee Scheme (HGS), First Home Guarantee Scheme is administered by Housing Australia. Under this scheme, a part of the home loan is guaranteed by Housing Australia, which is capped at 15% of the property purchase price. It means you can become a homeowner with a deposit as low as 5%. Although this guarantee is not a deposit nor a cash payment, it safeguards buyers’ interests and also eliminates the need for LMI.
However, this scheme is available through selected lenders and annual applications are capped. The eligibility criteria for this scheme include
- Applicants must be first-time home buyers.
- Must be Australian citizens or PR
- There is an income cap of $125,000 for singles and $200,000 for couples or combined income.
- Property must be used for residential purposes for the buyer.
- Property purchase prices are capped, for instance, at $800,000 in Melbourne and $700,000 in Brisbane.
First Homeowner Grant (FHOG)
The First Homeowner Grant scheme extends to first-time home buyers who want to purchase newly built homes for their living. This scheme provides eligible candidates with a one-time grant ranging from $10,000 to $15,000, which they can apply towards their deposit payment. Apart from monetary grants, this scheme also provides up to 50% concession in stamp duty, which also helps in bringing down deposit and overall cost. However, the property purchase price is capped at $750,000 and it should be the principal place of residence (PPR). Property value for concessions in stamp duty or land transfer tax is capped at $600,000. In Victoria, however, no stamp duty is payable on properties under $600,000.
Homebuyer Fund
The Victorian Homebuyer Fund or Shared Equity Scheme allows you to pay only a 5% deposit on your home, with the Victorian government contributing up to 25% of the property purchase price in exchange for shared equity in the property equivalent to the contribution. The net payment comes down to 20% of the purchase price, making it a rather zero-deposit scheme for applicants. Aboriginals and Torres Strait Islanders require only a 3.5 % deposit, with the Victorian government paying 35% of the shared equity contribution.
All these schemes allow home buyers to significantly reduce their deposit requirements to 5% or less, requiring less cash up front.
How to strengthen your application with a 5% deposit?
Having government assistance is not enough. If you plan to pay only a 5% deposit, your application must be flawless and must include:
- Evidence of genuine savings, which strengthens your intent to keep up with mortgage payments. The deposit amount should remain in your account for not less than 3 months.
- Reducing other liabilities to power your credit score and enhance your borrowing capacity.
- Proof of stable employment or a steady source of income increases your chances of acceptance.
Is the 5% Deposit Right for You? Key Factors to Consider?
Before deciding to buy a home with 5% deposit, ask yourself the following:
- Can you comfortably afford the repayments, including interest rate rises?
- Is your job or income source stable enough to support a larger loan?
- Are you eligible for any of the government schemes mentioned above?
- Do you have an emergency fund or savings beyond the deposit?
A 5% deposit can be an excellent opportunity for first-time home buyers, especially when paired with the right support and strategy. However, it’s not a one-size-fits-all solution. Assess your personal finances, seek professional advice, and consider both the short-term benefits and long-term responsibilities of homeownership.
Getting in touch with a licenced real estate and property advisor in Melbourne helps you avail yourself of all the benefits of this scheme while mitigating risks and chances of failure. At Blue Chip Properties, we help our clients purchase their dream properties through robust negotiations and by exhausting every available option to reduce their tax burden and overall cost.
