First Home Guarantee Scheme. Should You Buy With the Scheme?

Using the First Home Guarantee allows you to buy sooner with a smaller 5% deposit by avoiding Lender's Mortgage Insurance (LMI), while saving a 20% deposit helps you avoid LMI entirely, leading to lower loan costs and reduced monthly repayments. The best choice depends on your financial situation, risk tolerance, and housing market conditions; the Guarantee is faster but more expensive long-term, whereas a 20% deposit is slower but cheaper.

In this article we will explain some of the factors you need to consider before making this decision. One factor can be the most significant reason why the scheme may not work for you.

Should You Use the Home Guarantee Scheme or Save for the 20% Deposit?

Since the announcement of the expanded First Home Buyer's Guarantee Scheme, many buyers have been wondering if it would be better buying with the new Home Guarantee Scheme? Or would it be better to buy when they've the 20% deposit? On the surface, the answer seems obvious, 20% means smaller loan amount, and thus the total mortgage repayment would be lower. IE, the mortgage is cheaper. But is it that simple though... In this article, we will dissect this question and answer this question.

What is the new Home Guarantee Scheme (HGS)?

The new 5% deposit policy is the revised version of the original Australian Government's First Home Guarantee, which lets first home buyers buy their homes with a 5% deposit. The government guarantees a portion of the loan to the lender, eliminating the need for Lenders Mortgage Insurance (LMI). From 1 October 2025, this scheme has been revised, and expanded, removing income caps and lift property price caps. This makes the scheme available to more first home buyers and allows them to enter the housing market years sooner.

How Did the First Home Guarantee Scheme Come About?

The First Home Guarantee (FHG), the predecessor of the Australian Home Guarantee Scheme (HGS), was first launched in January 2020 to help first-home buyers overcome the 20% deposit barrier. In cities like Melbourne and Sydney, where median prices often sit around or above $800k, saving $160k–$200k while renting can take years. The FHG lets eligible first home buyers purchase with a 5% deposit and no Lender's Mortgage Insurance (LMI), using a government guarantee to break the 20% “deposit trap” and enter the property market sooner. It began with capped places, but from 1 October 2025 the scheme was revised and renamed into the Home Guarantee Scheme (HGS) offering unlimited places and higher price caps, further widening access for first home buyers.

Some analysts also link the scheme’s evolution to shifts in lending rules. APRA eased the old 7% assessment floor in 2019, moving to a buffer approach, initially set at 2.5%. This coupled with the ultra low interest rates during the 2020-2022 COVID pandemic, worked so well, that house prices boomed across Australia. This lending assessment was then tightened again in October 2021, lifting the serviceability buffer to 3%. The FHG was introduced to bridge that gap: remove Lenders Mortgage Insurance (LMI) for low-deposit purchases via a government guarantee, while banks maintain prudent credit standards. This scheme was initially popular, with long waiting lists for the limited places. In recent years, however, the higher interest rates, high cost of living, created a income squeeze on buyers, and the limited First Home Guarantee places were very often less than half utilised. There are more spots than interested first home buyers.

What are the Revised House Price Cap in the Home Guarantee Scheme?

Recognising the increased house prices since the original scheme was first launched, the scheme has been revised with price caps for houses has been raised.

Location	Current Property Price Cap	Property Price Cap effective 1 October 2025
NSW – capital city and regional centre	$900,000	$1,500,000
NSW – other	$750,000	$800,000
VIC – capital city and regional centre	$800,000	$950,000
VIC – other	$650,000	$650,000
QLD – capital city and regional centre	$700,000	$1,000,000
QLD – other	$550,000	$700,000
WA – capital city	$600,000	$850,000
WA – other	$450,000	$600,000
SA – capital city	$600,000	$900,000
SA – other	$450,000	$500,000
TAS – capital city	$600,000	$700,000
TAS – other	$450,000	$550,000
ACT	$750,000	$1,000,000
NT	$600,000	$600,000
Jervis Bay Territory and Norfolk Island	$550,000	$550,000
Christmas Island and Cocos (Keeling) Islands	$400,000	$400,000

Pros and cons of First Home Guarantee Scheme

While this program seems exciting on the surface, there are benefits and risks, just like any other financial programs. The First Home Buyer Guarantee is no exception. There are clear pros and cons, which buyers must know before they buy their properties with this scheme.

What is the Benefit of the Home Guarantee Scheme?

On the plus side, it helps first home buyers get into the market years earlier with just a 5% deposit, avoiding costly Lender’s Mortgage Insurance, and allowing them to capture property growth sooner. A huge advantage in markets like Melbourne where prices have historically risen around 7% annually. It’s particularly beneficial for young professionals with solid incomes but limited savings, or for renters tired of watching property values outpace their ability to save.

What is the Problem with the Home Guarantee Scheme?

On the downside, buyers will be borrowing 95% of the house price, meaning buyers are taking on a bigger loan, higher monthly repayments, and paying more interest over time. The scheme can also become a problem if the value of the property stagnate or fall, leaving buyers exposed to negative equity. It is thus not suitable for those with unstable income, high personal debts, or who are already stretched financially, as the repayment stress can outweigh the benefit of getting in early.

In short: the Home Guarantee Scheme is a shortcut for disciplined, growth-focused buyers, but a risky move for anyone on shaky financial ground.

Home Guarantee Scheme - How Can You protect yourself?

If you’re using the Home Guarantee Scheme to buy your first home, asset selection is critical. Because you’re purchasing with a high loan-to-value ratio, a small price dip can push you toward negative equity, a situation you do not want to find yourself in, if you have to sell the property. Choose good locations with strong fundamentals, solid amenities and employment access, so the property’s value can grow faster than your loan balance.

Things you can do to protect yourself:

• Get property appraised with our accuracy guaranteed Real Price Appraisal (NOT agent's price guides) before you buy and avoid overpaying.

• Buy in established locations instead of new / oversupplied locations.

• Maintain a cash buffer for rate rises and repairs.

• Consider engaging an independent buyers advocate to help location and property selection and negotiate the best price.

Should you Use the Home Guarantee Scheme?

Now, to answer the dilemma for first home buyers in Melbourne: should you buy your first home now with a small deposit under the Home Guarantee Scheme, or wait years to save up 20%?

There is unfortunately no simple, straight forward answers. It depends on many factors such as:

• Your financial situation. Essentially, your income, expenses, future plans.

• The property. The type of property, location, etc

• The property market. The performance of the property market, growth cycle

• The anticipated performance of the property market

Should You Use the Home Guarantee Scheme If You are on a $120k Annual Salary?

To try to answer this question, let us discuss some considerations, and run through the numbers for two identical buyers, both earning $120,000 annual income, both targeting Melbourne homes, but taking very different approaches. One using the Home Guarantee Scheme, and the other saving up the 20% deposit. These 6 considerations are not exhaustive. But they are the most common considerations which all home buyers should consider before they decide which path suits them. The 6th Consideration is the most critical consideration EVERY buyer must consider, before they buy.

Considerations BEFORE Using the Home Guarantee Scheme

Let's look at some factors which all first home buyers should consider when they decide if and when they should buy. Buyer A is using the Home Guarantee Scheme, and Buyer B is buying with the 20% deposit. Both buying in the same budget range.

Consideration 1: Borrowing Power on $120k Annual Income

Banks generally cap lending at around 5-6 times income if you have no big debts. Applicants being assessed at a 4.5 times income is also not unheard of. It depends on the risk assessment by the individual bank and lender. A good mortgage broker would be the best person to provide the latest estimate.

• A $120k income would usually mean a max loan of ~$720,000–$750,000 after stress-testing.

So:

• Buyer A (5% deposit): would have a budget of around $750,000–$800,000 today.

• Buyer B (20% deposit): Would need to save $150k–$160k before buying a similar property. That saving process can take between 5–7 years for most buyers without extra help.

Buyer A: +1 = 1

Buyer B: 0 = 0

Consideration 2: Repayments and Total 30 Year Interest at 6.5%

Assuming the buyers are taking a 30-year loan, with an average interest rate of 6.5% of the life of the mortgage, here’s how the repayments stack up, if they are buying $750,000 properties:

Scenario	Property Value	Deposit	Loan	Monthly Repayment @6.5%	Total Interest (30 yrs)
Buyer A 5% deposit	$750,000	$37,500	$712,500	~$4,500	~$914,000
Buyer B 20% deposit	$750,000	$150,000	$600,000	~$3,800	~$770,000

💡 The 5% buyer pays ~$700 more each month and ends up paying ~$140,000 more in lifetime interest.

Buyer A: 0 = 1

Buyer B: +1 = 1

Consideration 3: Equity and Net Worth After 5 Years

Now, assuming the properties they buy are growing at an average Melbourne growth rate of 7% per year (its historical average).

The $750,000 property would rise to $1,050,000 after 5 years, when Buyer B has saved sufficient for their 20% deposit. This also assumes they are buying with a $750,000 budget. By then, that would usually mean the property is approximately 10-20km FURTHER from the city centre.

Buyer A (5% deposit, bought immediately)

• Remaining loan after 5 yrs: ~$667,000

• Equity: $1,050,000 – $667,000 = $383,000

Buyer B (20% deposit, waiting)

• Still renting and saving.

• Needs ~$210,000 deposit to buy at new $1.05m price.

• Equity at 5 yrs: basically their savings only (deposit).

💡 At 5 years, Buyer A is $170k–$180k ahead thanks to market growth.

Buyer A: +1 = 2

Buyer B: 0 = 1

Consideration 4: Equity and Net Worth After 10 Years

What happens at year 10? With the Melbourne average annual growth of 7%, property doubles roughly every 10 years. The $750,000 property is now worth $1,476,000 after 10 years.

Buyer A (5% deposit)

• Loan balance after 10 yrs: ~$616,000

• Equity: $1,476,000 – $616,000 = $860,000

Buyer B (20% deposit, buys in year 5)

• Purchases at $1,050,000 with 20% deposit ($210,000).

• Loan: $840,000

• After 5 years of repayments, balance ≈ $803,000

• Property value at year 10: $1,476,000

• Equity: $1,476,000 – $803,000 = $673,000

💡 At 10 years, Buyer A (5% deposit) is still ~$190k ahead in net equity, even after higher repayments and more interest.

Buyer A: +1 = 3

Buyer B: 0 = 1

Consideration 5: The Verdict

• If Melbourne grows at 7%: The First Home Buyer Guarantee puts you ahead, because entering the market earlier allows you to enjoy the higher equity growth. It outweighs the extra interest costs. Buyer A is ~$190k richer in net worth after 10 years compared to Buyer B who waited. Buyer A's net worth will be even higher, if the property rises at a much higher rate.

• In a stagnant or falling market: Buyer B (20% saver) is safer — less debt, smaller repayments, less risk of negative equity.

👉 Conclusion: The First Home Buyer Guarantee is a strategic tool that, in a rising market, makes buyers significantly wealthier than waiting. The key is having income stability to handle the higher monthly repayments.

Consideration 6: Where Can You Buy with the Budget?

Now the curve ball. Let's assume Buyer B already have the 20% deposit. This is probably the most important thing first home buyers need to consider. Where can first home buyers buy for the budget. Assuming the $120k income would result in a borrowing capacity of $720k.

Buyer A (5% deposit)

Buyer A's budget for buying their first home is $37,500 + $720,000, giving them a budget of $757,500, restricting the buyer to smaller houses in new estates, or locations which are approximately 30-40 km away from the CBD. Most of these locations also tends to be higher crime and had poorer amenities. In the current Melbourne property market, the sub $800k budget is full of buyers and competition is strong.

Buyer B (20% deposit)

Buyer A's budget for buying their first home is $150,000 + $720,000, giving them a budget of $870,000. In fact, with a 20% deposit, they are not limited by the First Home Guarantee price cap of $950,000. Assuming they already have the 20% deposit, the $870,000 budget means the quality of housing and location is a big upgrade to a $757,500 property. At $870,000, it would typically be much nearer to the city, in more mature residential areas, with better schools, transport, shops and other amenities. In this price range as well, competition is a lot lesser, as it is often out of a first home buyer's budget. Making it is easier to buy better homes with lesser competition.

With the 20% deposit ready NOW, Buyer B will be ahead in all fronts. Better growth (in dollar terms) due to the better location, higher property price.

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Home Guarantee Scheme FAQs

1. Is the Home Guarantee Scheme worth it?

Yes. But only if you’re financially stable and buying in a growth market. The scheme helps you buy earlier with just 5% deposit and avoid LMI. If Melbourne property continues its long-term growth trend, you’ll usually be ahead compared to waiting. However, if your income is unstable or prices fall, it can put you under repayment stress.

2. How much can I borrow with the Home Guarantee Scheme?

Your income and expenses determine your borrowing power, not just the scheme itself. For example, on a $120k income, most lenders will approve around $700k–$750k, assuming no other debts. The scheme then allows you to purchase up to the price cap with only a 5% deposit.

3. Who benefits most from the Home Guarantee Scheme?

• Young professionals or couples with strong incomes but little savings.

• Renters who can service a mortgage but can’t save fast enough for 20%.

• First home buyers in growth suburbs who want to capture capital growth sooner.

4. Who should avoid the Home Guarantee Scheme?

• Buyers with unstable income or insecure employment.

• Households already carrying large debts (car loans, credit cards).

• Anyone at high risk of “mortgage stress” if interest rates rise further.

5. Can I use the Home Guarantee Scheme with other grants?

Yes. You might be able to combine it with the First Home Owner Grant and state-based stamp duty concessions. This reduces your upfront costs even further, but eligibility varies by state, so check current Victorian or your state's rules before committing.

6. Does using a 5% deposit mean I’ll pay more interest?

Yes. Because you are borrowing 95% of the property price, higher mortgage means higher repayments and higher lifetime interest costs. Higher LVR usually means a slightly higher interest rates as well. Over 30 years, a 5% deposit loan can cost $150k–$250k more in interest than a 20% loan. The trade-off is you get into the market earlier, which often more than makes up the difference if property values rise.

7. Should I buy now with 5% deposit or wait to save 20%?

If prices rise at Melbourne’s historical 7% growth, buying now with 5% leaves you wealthier in the long run. After 10 years, the “buy now” buyer is often $150k–$200k ahead compared to the one who waited. But if you are buying in a stagnate or falling market, waiting may be safer.

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Where Can You Call to Discuss Personalised First Home Buying Plans?

At Concierge Buyers Advocates, we help Melbourne first home buyers decide whether to buy now with a 5% deposit or wait to save 20%. Our team analyses identifies the locations for you by analysing historical suburb growth, future growth indicators to help you avoid overpaying.

So, if you find yourself asking:

• “How much can I borrow on $120k income?”

• “Is the First Home Buyer Guarantee worth it in Melbourne?”

• “Should I buy now with 5% or wait to save 20%?”

📞 Talk to Concierge Buyers Advocates today. We’ll give you clear, data-driven advice and a 99.5% success track record in getting Melbourne buyers ahead.