Australian Prime Minister Anthony Albanese has announced a government scheme to assist first-time homebuyers in Australia. The key components of the policy include that all first-time homebuyers will be eligible to purchase a home with just a 5% deposit. The government will guarantee up to 15% of the loan value, eliminating the need for Lenders Mortgage Insurance (LMI), which can cost around $23,000. This scheme will be available for homes valued up to the average price in each city and region, with specific caps (e.g., $1.5 million in Sydney, $950,000 in Melbourne).
For first-time home buyers, what’s the difference between a 5% and a 20% deposit? What does it mean? Should we purchase the first home using this 5 percentage scheme?
Break down the number
Suppose you need to purchase a home worth $900,000. What’s the difference between choosing a 5% deposit and a 20% deposit? I converted the figures based on NSW government data and came up with the following comparison.
You will also find
- The monthly mortgage difference is $766
- Yearly mortgage difference will be $766×12=$9192
- The difference in deposit is $135,000
How long does it take to save enough for a deposit?
If you can save $1,000 per month, 5% deposit will take you 3.75 years and 20% deposit 15 years!
If you’re a couple, it will shorten the time half, then 20% deposit will still need you 7.5 years.
Now you understand 5% deposit means you can afford a home 5 times faster. But, what’s the cons of this?
Comparison of funds after selling the property in 8 years
If the Aussie property growth is 5% p.a., its value after 8 years would be approximately $1,329,710 (an increase $429,710 compared to the buy price).
To make the calculation simpler to understand, let’s say the inflation is 3% per year. You will find
- Total Paid (5% Deposit): $500,448
- Total Paid (20% Deposit): $426,912
- Extra Paid with 5% Deposit: $73,536
You paid $73,536 more in loan repayments over 8 years due to the higher monthly cost.
How much you actually paid over 8 years, plus the deposit
- 5% Deposit: $545,448
- 20% Deposit: $606,912
- Difference: The 5% deposit scenario results in $61,464 less total outlay.
Net Gain After Selling the Property
- 5% Deposit: $44,475
- 20% Deposit: $106,834
Conclusion: Does 5% deposit work better?
With the 5% option, you pay less over 8 years and have lower financial pressure, though your profit will also be lower.
For me, living is the main priority—making a profit from the property is not the primary goal. I can use the greater cash flow flexibility under the 5% deposit to invest elsewhere (as long as the return exceeds 5%), which gives me the opportunity to achieve similar overall returns to the 20% deposit, while still enjoying the same living experience.
I plan to create an online calculator so you can make your own results. Will update the progress later.
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