Guarantor loan or 5% deposit scheme: Which path could suit a first-home buyer?
Saving a 20 percent deposit can take years, and in a market where prices keep moving, that wait can push homeownership further out of reach. For many first-home buyers, the deposit is the single biggest hurdle. The good news is that there are ways to get in sooner.
Two of the most popular are a guarantor home loan, where a family member backs your loan using the equity in their property, and the government-backed 5 percent deposit scheme, which lets eligible buyers purchase with just 5 percent down. In this blog post, we break down how each one works, compare their benefits and risks, and help you work out which path may suit your situation.
Key takeaways
- A guarantor loan uses a family member’s property equity as additional security.
- The government scheme allows eligible buyers to purchase with a 5% deposit.
- Both pathways may help buyers avoid paying Lenders Mortgage Insurance.
- Guarantor arrangements can put a family member’s property at risk.
- The government scheme does not require family assets as security.
- Buyers should compare affordability, upfront costs, and guarantee risks before choosing.
Guarantor loan vs 5% deposit scheme overview
Before comparing the two pathways, it helps to understand how each mechanism operates.
A guarantor home loan involves a family member, typically a parent, using the equity in their own property as additional security for your home loan. This extra security allows a lender to approve a higher borrowing ratio without requiring you to save a full 20 percent deposit or pay Lenders Mortgage Insurance (LMI).
On the other hand, the Australian Government's 5 percent deposit scheme allows eligible first-home buyers to purchase a property with a minimum deposit of just 5 percent (or 2 percent for single parents and legal guardians).
Instead of relying on a family member's assets, the government provides a guarantee to a participating lender. This backing covers the shortfall between your small deposit and the lender's standard 20 percent requirement, allowing you to bypass LMI entirely.
Guarantor loan vs 5% deposit scheme: Key differences
While both options help buyers enter the market with minimal upfront savings, they differ significantly in structure, risk profile, and eligibility.
Read on for a detailed breakdown of eligibility, risks, and upfront costs.
1. Eligibility requirements for each pathway
Who can apply is the first big difference, as the two options follow very different rules, which are explained below:
- 5% Deposit Scheme: This government initiative has specific criteria. Applicants must be Australian citizens or permanent residents aged 18 or older, purchasing a residential property as an owner-occupier. Properties must fall at or below established location-specific price caps. There are no income caps, meaning high and moderate earners alike can apply, provided they meet the lender's credit and serviceability requirements.
- Guarantor Loan: This path does not rely on government price caps or citizen-only restrictions in the same way, but it is entirely dependent on the availability and financial health of a willing family guarantor. The guarantor must have sufficient equity in their own property to support your loan. Lenders will assess both your ability to service the debt and the guarantor's suitability before approving the loan.
2. Risk and family impact
The two options spread risk very differently, and one can put a family member’s home on the line, so here is how they compare:
- 5% Deposit Scheme: The risk is absorbed externally through government backing rather than personal relationships. If your financial circumstances change unexpectedly, you face standard mortgage default processes, but no family member's home is directly tied to your debt.
- Guarantor Loan: This option carries interpersonal and financial risks. A guarantor legally agrees to cover the debt if default occurs. If the borrower faces severe financial distress and the property sells for less than the loan balance, the guarantor may be forced to pay the remaining shortfall, potentially risking their own family home. Open communication and independent legal advice are mandatory safeguards for this path.
3. Upfront costs and LMI
Both paths help you skip Lenders Mortgage Insurance, but the cash you need upfront still varies, as shown below:
- 5% Deposit Scheme: By removing LMI, the scheme significantly reduces upfront purchase expenses. Buyers only need to save the minimum 5 percent deposit, plus standard acquisition costs such as conveyancing and government fees.
- Guarantor Loan: This setup also avoids LMI because the combined security brings the effective Loan-to-Value Ratio (LVR) down to 80 percent or lower. However, buyers still need to save enough cash to cover their initial deposit portion and transactional costs, such as stamp duty where applicable.
4. Property restrictions and flexibility
The type and price of home you can buy depends on your path, so it pays to know the limits, which are outlined here:
- 5% Deposit Scheme: Purchases are restricted to properties priced at or below the government-set regional or capital city price caps. Eligible property types include existing houses, townhouses, apartments, off-the-plan purchases, and house-and-land packages.
- Guarantor Loan: This option offers greater flexibility in property choice and location, as it is not subject to government price caps. As long as the lender accepts the security property and the valuation aligns, buyers can target a broader range of real estate markets.
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Which is better for first home buyers: Guarantor loan or 5% deposit?
Deciding between a guarantor arrangement and the government deposit scheme depends heavily on your support network and property preferences.
If you have supportive family members willing to tie a portion of their property equity to your loan, and you wish to purchase a home that exceeds government price caps, a guarantor loan may provide the flexibility you need. However, it requires complete transparency and trust, as well as formal legal counsel to protect all parties involved.
If you prefer financial independence without involving family assets, the government deposit scheme offers a streamlined route. Providing you find a property within the regional price limits and meet lender approval criteria, you can bypass LMI and secure a home with minimal upfront savings.
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Get expert help with your first home loan application
Moving from renting to owning can feel overwhelming, especially when you are weighing a family guarantor loan against government-backed assistance. Having a professional guide by your side makes it easier to align your current finances with your long-term property goals.
At ZedPlus, our lending team supports first-home buyers at every stage of the process:
- Comprehensive borrowing capacity assessments: We review your income, savings history, and regular expenses to work out how much you can comfortably borrow under both standard lending criteria and government schemes.
- Location and price cap analysis: We check your target suburbs against current government price limits to confirm your preferred property meets the eligibility requirements.
- Lender and product matching: Every lender has different credit policies, so we compare options across multiple institutions to find a loan structure that keeps your costs low and avoids unnecessary Lenders Mortgage Insurance.
- Step-by-step application management: From pre-approval documentation to coordinating with family guarantors or submitting through the government portal, we handle the administrative workload to keep your purchase on track.
Our goal is to cut through the complexity, clarify your options, and help you secure the right first home buyer loans sooner.
Already own a property? Explore our home loan refinancing options to see if you could save.
Guarantor loan and 5% deposit scheme FAQs
1. Is it good or bad to have a guarantor?
It depends on your personal circumstances. Having a guarantor is a major advantage because it allows you to buy a home sooner with a smaller deposit while completely avoiding costly Lenders Mortgage Insurance (LMI). It can also help increase your overall borrowing capacity.
However, it requires a family member to take on significant financial risk by tying equity in their own property to your mortgage. If you run into financial trouble and default on your repayments, your family member's home could be put at risk.
2. What are the risks of being a guarantor?
The main risk of becoming a guarantor is taking on legal liability for someone else's debt. If the primary borrower fails to make their mortgage repayments and the home is sold for less than the remaining loan balance, the lender can demand payment directly from the guarantor to cover the shortfall.
This can put the guarantor's home, savings, or assets on the line. In addition, being a guarantor reduces your own borrowing capacity for future personal or investment loans until the guarantee is officially discharged.
3. How much money can I borrow with a guarantor?
With a guarantor, you can typically borrow up to 100% to 110% of the property's purchase price in Australia. Borrowing beyond 100% allows you to cover additional upfront purchasing expenses, such as government stamp duty, transfer fees, and legal costs. However, the exact dollar amount you are eligible to borrow still depends on your personal income, living expenses, existing debts, and overall serviceability as assessed by the lender.
4. Will 5% deposit increase house prices?
Government initiatives that lower deposit requirements tend to increase overall buyer demand in the market. In highly competitive, entry-level price brackets, this influx of new buyers can place upward pressure on property prices. However, because government schemes enforce strict regional price limits, this upward price pressure is mostly confined to lower- and mid-tier market segments rather than the broader housing market.
5. What are the pros and cons of a 5% deposit scheme for first-home buyers?
The main advantage of a 5% deposit scheme is that it allows first-home buyers to enter the property market much faster without needing to spend years saving a full 20% deposit. It also saves buyers thousands of dollars upfront by waiving Lenders Mortgage Insurance (LMI) while allowing them to maintain complete financial independence without relying on family guarantees or assets.
On the other hand, the key downside is that borrowing 95% of the property value results in a larger overall home loan balance, which leads to higher monthly repayments and more total interest paid over time. Additionally, buyers must select properties that fall under strict government price caps and meet lender eligibility criteria.
Conclusion
Both a guarantor loan and the government 5% deposit scheme offer fast-track routes into the market without saving a full 20% deposit or paying Lenders Mortgage Insurance. If you want maximum borrowing flexibility and have a family willing to support you, a guarantor loan can help you buy above government price caps. If you prefer financial independence and your target home falls within regional limits, the 5% deposit scheme is an ideal choice. Book a call with one of our loan experts today to compare your options and secure the right loan for your first home.
