The 5% Deposit Policy Sounds Like a Gift. It's Not.

I'm going to say something that won't make me popular with first home buyer advocates.

The 5% deposit policy is not your friend. It looks like one. It sounds like one. The press release reads beautifully. But when you pull out a calculator and run the actual numbers on a 95% loan-to-value ratio mortgage in 2023, the picture changes fast.

I've helped clients purchase over 150 properties across Melbourne. Some used low-deposit schemes. Most of them regretted it within eighteen months. Not because the house was bad — because the financial structure was designed to benefit someone other than them.

Let me explain why.

What the policy actually does (and who it really serves)

Australia's federal 5% deposit scheme — the First Home Guarantee Scheme, or FHGS — allows eligible buyers to purchase with just 5% down and no Lenders Mortgage Insurance 1. Victoria's own version, the Victorian Homebuyer Fund (VHF), goes further: the government co-invests up to 25% of the property value, meaning your bank loan covers only 70% 2.

Sounds generous. But think about it from the policymaker's perspective for a second.

People who already own property get a boost — their assets are suddenly in higher demand from a new wave of buyers who previously couldn't afford entry. People who don't own property get sold a dream of ownership that comes with a 30-year ball and chain of repayments they can barely service.

One policy. Two voter demographics. Both happy on announcement day. That's not cynicism — that's electoral arithmetic.

The housing advocacy group Everybody's Home noted in their 2022 report that demand-side subsidies historically push prices up rather than improving genuine affordability 3. And CoreLogic's analysis showed that in the 12 months after the FHGS launched, median prices in eligible price brackets rose faster than the broader market 4.

So the scheme inflates the very prices it claims to make affordable. Brilliant, really.

The maths that nobody shows you

Here's the scenario I walk through with every first home buyer who mentions the 5% policy.

You buy a $800,000 property with 5% down. That's $40,000 deposit. Your mortgage is $760,000.

At a variable rate of 5.85% (which is roughly what the major banks were offering on P&I investment loans in early 2023 5), your monthly repayment is approximately $4,480. That's $1,034 per week.

Now add council rates ($2,000/year), water ($650/year), insurance ($1,500/year), and maintenance ($1,500/year) 6. Your total annual housing cost is around $59,400. That's $1,142 per week all-in.

For a household earning the Melbourne median of roughly $98,000 gross 7, you're spending over 60% of pre-tax income on housing. The generally accepted stress threshold is 30%.

But here's the part that actually terrifies me.

If the property drops 10% in value — which happened across large parts of Melbourne between mid-2022 and early 2023 4 — your $800K home is now worth $720K. You still owe the bank $760K. You are $40,000 underwater. On paper, you're insolvent.

And what did you buy with that 5% deposit? Almost certainly not a 600-square-metre house in an established suburb. More likely a townhouse or small-lot package in an outer growth corridor. The exact type of property with the weakest long-term capital growth and the most competition from new supply 8.

"The data tells a different story to the headlines," says Yan Zhu, Co-Founder & Chief Data Officer at PremiumRea. "A 5% deposit buyer is taking on maximum leverage with minimum buffer, on an asset class that historically underperforms. That's not a pathway to wealth — it's a pathway to financial stress."

Why the VHF is slightly better but still has teeth

Victoria's Homebuyer Fund deserves separate treatment because it's structurally different from the federal FHGS. Under the VHF, the government contributes up to 25% of the property price (capped at $950,000), and you only need 5% deposit with no LMI 2.

The good part: your actual loan is only 70% LVR, which means much lower repayments than the federal scheme. On the same $800K property, you're borrowing $560,000 instead of $760,000. Monthly repayments drop to about $3,300. That changes the equation meaningfully.

The catch: the government owns 25% of your property. If your home goes up by $200,000, the government takes $50,000 of that gain when you sell or refinance. You're giving away a quarter of your upside for the privilege of low entry.

Worse, while the government holds their share, you cannot purchase additional investment properties. Your portfolio is frozen at one 2. For anyone with wealth-building ambitions, that's a serious constraint.

There is a workaround — and we've helped clients execute it. Buy with the VHF, make the minimum cosmetic improvements, wait 12-18 months for natural appreciation, then refinance at the higher valuation to repay the government's 25% share in full. Once that's cleared, you're free to convert the property to an investment and buy again. One of our clients did exactly this: purchased at $600K with VHF, did a $10K refresh, bank revalued at $650K+, refinanced to pay out the government, and now collects $850/week in rent while planning their second purchase 9.

But that requires discipline, planning, and enough cash flow to service the loan until the exit point. Most 5% deposit buyers don't have that runway.

If you can't save 20%, should you buy at all?

This is where I lose half the room. But I'm going to say it anyway.

If you genuinely cannot save a 20% deposit, you probably shouldn't be buying property right now. Not because you're a failure — because the financial risk is too high relative to your current position.

I know that's hard to hear when every second Instagram ad is telling you property only goes up and you're "missing out". But missing out on a bad deal is not missing out. Missing out on a bad deal is called good judgement.

The correct sequence — and I say this from having watched hundreds of clients go through the process — is:

1. Build your income first. Invest in your career, your skills, your earning capacity.
2. Save aggressively. Target 20% deposit plus 5% for stamp duty and costs.
3. Buy your first property with equity buffer and borrowing capacity intact.
4. Then use that property's growth to fund the next one through refinancing.

Our team sees clients every week who want to skip straight to step 3. Some of them have $30,000 in savings and a household income of $90K. I won't take their money. Not because I don't want the business — because putting them into a $700K mortgage with $35K equity and zero margin for error is something I wouldn't do to a stranger, let alone a client.

"If you can't save 20%, rent and invest the difference in yourself," says Yan Zhu. "The first property you buy should be the one that funds your second. If it can't do that, you've bought a liability, not an asset."

What if you're an investor watching from the sidelines?

Plenty of existing property owners got excited when the 5% policy was announced. The logic: more buyers flooding the sub-$1M market means my property goes up.

Maybe. Short-term, demand-side stimulus does inflate prices in the target bracket. But think one layer deeper.

Developers see the policy. They know there's a wave of buyers approved for $800K-$950K. So they build more product in that range — particularly house-and-land packages in growth corridors. Wyndham, Casey, Cardinia LGAs are already seeing record dwelling approvals 10.

What happens when you flood a price segment with supply? The price softens. The very policy designed to help buyers get in may end up creating oversupply in the segments those buyers can afford.

Now compare that to established suburbs in Melbourne's southeast and east — Cranbourne, Hampton Park, Narre Warren, Boronia — where there is no new land supply. These suburbs are constrained. You can't manufacture 600-square-metre blocks in Hampton Park. They don't exist anymore. The premium for established, land-heavy properties in supply-constrained areas will widen as the growth corridors get saturated.

So if you're investing, don't chase the policy. Chase the scarcity.

At PremiumRea, our hard rule is that land value must exceed 80% of total purchase price 9. We only buy houses on 500+ square metres in suburbs where no new comparable supply can be built. That principle has delivered an average capital growth rate of 8-10% annually across our client portfolio — regardless of what deposit scheme the government of the day is spruiking.

The uncomfortable truth about policies and consequences

Every policy creates second-order effects that the designers never intended. Negative gearing was supposed to encourage developers to build more housing stock. Instead, it became the favourite tax minimisation tool for high-income earners 11. Victoria's COVID stimulus packages felt great at the time. Now Victorians are paying for them through the highest state debt in the country.

The 5% deposit scheme will have its own unintended consequences. Maybe it's a wave of mortgage stress in 2025 when rates haven't dropped as fast as people hoped. Maybe it's a glut of developer stock in specific corridors that depresses prices for a decade. Maybe it's something nobody's thought of yet.

I'm not predicting doom. I'm saying: don't build your financial future on a policy designed to win an election cycle. Build it on fundamentals. Buy land in constrained supply areas. Buy below bank valuation. Make sure your holding costs are covered by rental income within 2-3 years. And never, ever stretch yourself to 95% LVR just because the government said it's okay.

The government doesn't care if you go bankrupt. Your bank doesn't care. The only person who cares is you.

So care enough to run the numbers properly before you sign.