How to use the 5% deposit scheme without overpaying for your first home

Property prices have jumped, and for many first-home buyers, that makes saving a 20 per cent deposit feel almost impossible, especially when property prices grow faster than wages. 

That’s why the Federal Government’s First Home Guarantee (5 per cent deposit scheme) has become so popular. With as little as 5 per cent down, buyers can avoid Lenders Mortgage Insurance (LMI) and enter the market sooner.

But reducing the deposit requirement doesn’t remove the biggest risk of overpaying because you bought the wrong property or rushed into a decision. Used wisely, the scheme accelerates home ownership. Used poorly, it can create years of financial pressure.

Here’s how to use the scheme to your advantage without paying more than a property is worth.

Understand the scheme’s limits

The First Home Guarantee comes with income caps and purchase-price thresholds depending on your area. These limits naturally funnel many buyers into similar price ranges, which increases competition and the risk of overpaying.

Before looking at any property, get very clear on what you can comfortably afford long term.

Think about what monthly repayments feel truly manageable, even if interest rates rise or stay higher for longer. Include all holding costs in your calculation: council rates, strata (if applicable), insurance, and maintenance. Set aside a financial buffer for any unexpected repairs, minor renovations, or lifestyle expenses. Set a purchase ceiling that aligns with your actual budget, not the bank’s maximum borrowing amount.

Get clear on your lifestyle objectives

A common mistake first-home buyers make is treating the purchase like an investment, obsessing over future value-add potential, renovation upside, or long-term rental returns.

But buying your first home is primarily a lifestyle decision.

Focus on the floor plan, layout, number of bedrooms and bathrooms, parking, and proximity to work or family. Don’t overanalyse development potential or capital gains if your intention is to live in the home for several years. While growth potential is a nice bonus, it shouldn’t override day-to-day functionality.

I made this mistake personally. I once bought a family home through an investor’s lens, focusing too much on long-term potential and not enough on present-day usability. In hindsight, we would have been better off buying a more suitable home for our daily lives.

Avoid emotional decision-making

Unlike previous years, the scheme no longer has limited places. There’s no need to rush. Yet many buyers still feel pressured to act quickly out of fear the opportunity might vanish.

Rushing is one of the fastest ways to overpay.

Take your time, research properly, and treat the property purchase as a significant financial decision. Think beyond the excitement of getting a loan approved and focus on buying a property that will serve you for years to come.

Focus on value, not marketing

Display homes, new developments, and house-and-land packages are often marketed directly at first-home buyers. While they may appear attractive, many of these properties come with inflated prices due to developer margins.

Instead, consider established homes in tightly held areas. These often offer better land value, stronger long-term growth, and less exposure to oversupply. Your money goes further when you buy genuine value, not slick branding.

Use comparable sales as your safeguard

The most reliable way to avoid overpaying is to study recent comparable sales. Search for at least half a dozen similar homes sold in the past three to six months within a 1km radius. Compare land size, condition, street appeal, parking, layout, and proximity to key amenities like schools or transport.

If similar homes sold for $730,000 to $750,000 and your target property is listed at $780,000, the numbers speak louder than the agent’s pitch. Let real data guide your offer.

Never waive essential conditions

Even if you’ve only saved a 5 per cent deposit, you don’t need to sacrifice due diligence to appear like a strong buyer. Always conduct a building and pest inspection, get a strata report (for apartments and townhouses), and have your solicitor review the contract before signing.

These safeguards can save you tens of thousands in unexpected issues and far outweigh any perceived advantage from skipping them.

Your first home is a stepping stone, not the final destination

Many first-home buyers try to purchase their “forever home” straight away. This mindset leads to stress, overspending, and unrealistic expectations.

Instead, think in stages. Buy a quality, affordable home now. Build equity. Then use that equity to upgrade or invest in future years. The goal is to get a foothold in the market, not to tick every box at once.

The 5 per cent deposit scheme can be a huge boost for first-home buyers. But with great opportunity comes great responsibility. Don’t let urgency or incentives override common sense. Buy with clarity, discipline, and an understanding that your first home is a building block, not the finish line.