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Home Guarantee Scheme warning: why buying with a small deposit could backfire

Liz Seatter avatar
Liz Seatter
- 6 min read
Home Guarantee Scheme warning: why buying with a small deposit could backfire

With the federal government announcing more places under the Home Guarantee Scheme, RateCity.com.au is warning first home buyers to consider the risks before they jump in.

From 1 July, the number of spots available under the guarantee will be increased to 50,000 annually, which includes 35,000 spots for first-home buyers. This scheme allows first home buyers to purchase a property with a deposit as small as 5 per cent, without paying lenders mortgage insurance.

RateCity.com.au analysis shows if someone bought in Sydney using the scheme at the end of this year, they could potentially find their equity, which started at 5 per cent, drop to -6 per cent by the end of 2024. This means, at this point, the person owes the bank more than the property is worth.

The same person would see their monthly repayments rise by an estimated $539 by the end of 2024 due to rising interest rates.

For someone who buys using the scheme in Melbourne at the end of this year, their equity could drop to -7 per cent by the end of 2024.

These calculations are based on Westpac’s cash rate and property price forecasts through to the end of 2024. They assume a first home buyer buys at the end of this year using this scheme at the top of the property price cap for each capital city. The person starts with a 5 per cent deposit on CBA’s lowest variable rate available under this scheme.

Home Guarantee Scheme: why buying with a small deposit can be risky

CityProperty value today Property value - end 2024Change in property price by end 2024Equity at purchaseEquity - end 2024Increase in repayments - end 2024










































Canberra, Darwin







Source: RateCity.com.au Notes: based on a first home buyer buying a property at the end of 2022 as part of the government's FHLDS paying principal and interest on CBA's lowest variable rate appliable applicable for low deposit loans. Assumes property is purchased with a 5% deposit at the top of the property price caps as determined by NFIC. Westpac economics' property price and interest rate forecasts are applied. Property price forecasts for Canberra and Darwin are based on national forecasts.

RateCity.com.au research director, Sally Tindall, said: “So far, both sides of politics have put forward piecemeal schemes in an attempt to address Australia’s housing affordability problem. The problem is, neither scheme will make housing any more affordable.”

“Property prices and new mortgage sizes are both at record highs, while risky lending, where people are taking on debts that are six times or more their annual income, continues to rise. The regulators are sending out warnings while the politicians are telling people to jump in,” she said.

“Encouraging people to buy at inflated prices with next-to-no buffer in the face of rising interest rates comes with some pretty serious risks.

“To date, the Home Guarantee Scheme has helped thousands of Australians get a foot on the property ladder, and in many cases, capitalise on rising property prices. However, the outlook for the next couple of years is very different.

“Property prices are forecast to fall significantly in both Sydney and Melbourne over the next two years, so anyone buying with a 5 per cent deposit now, could find themselves owing the bank more than their property is worth by the end of 2024.

“While most new buyers should be able to ride out a drop in the property market, anyone who hits a rocky patch with no buffer, might not be able to make their monthly repayments and risk losing their home.

“Purchasing a property with a small deposit might help people buy sooner, however the ramifications of taking out a larger loan should be carefully considered.

“Buying with a 5 per cent deposit means a person’s loan size is significantly larger than if they had bought with a 20 per cent deposit. This means when interest rates rise, their repayments will go up by more. If property prices then drop, people using this scheme are also likely to be locked into their lender and their guarantor for longer.

“For anyone thinking about buying a property using this scheme, go in with your eyes wide open.

“Before you get a loan, the bank makes sure you can afford the mortgage repayments even if rates rise by 3 per cent. That said, it’s worth doing the maths yourself to make sure you’re comfortable with this figure,” she said.

Home Guarantee Scheme – potential pros & cons

Potential pros:

  • Avoid lenders mortgage insurance.
  • Get into your home sooner.
  • Stop paying rent.
  • Property prices could rise after you purchase your property.

Potential cons:

  • Property price drops could potentially leave you in negative equity.
  • Higher monthly repayments.
  • Pay extra interest over the life of the loan.
  • Some lenders charge higher interest rates for people with small deposits.

General tips for homebuyers:

  • Start small: If you’re starting out don’t expect to buy your dream home straight away, buy something you can afford and possibly improve.
  • Set a price limit: don’t rely on the bank to tell you what you can afford to borrow.  Think about how much debt you’re comfortable taking on.
  • Avoid mortgage stress: Mortgage stress is considered to be when low-and medium-income households are spending more than 30% of their pre-tax income on housing costs.
  • Keep a rainy-day fund: Pipes can crack, hot water systems can blow, so make sure you have a rainy-day fund ready to pay for unexpected costs associated with your new property.


This article is over two years old, last updated on March 28, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.

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This article was reviewed by Head of Public Relations Laine Gordon before it was published as part of RateCity's Fact Check process.