What Happens to Your Savings When You Use the 5% Deposit Scheme in Australia

The First Home Guarantee Scheme is one of the most powerful tools available to Australian first home buyers right now. A 5% deposit, no lenders mortgage insurance, no income caps, no waitlist. For buyers who qualify, it can save $20,000 to $35,000 in upfront costs and get them into the market years earlier than saving a full deposit would allow.

But there is a rule buried in the scheme's conditions that most buyers, and some brokers, do not fully explain before contracts are signed. And for buyers who find out about it at settlement rather than before, the consequences can be significant.

The Rule Most Buyers Do Not Know About

Under the Home Guarantee Scheme, applicants cannot retain excess savings above the permitted thresholds after settlement. Any savings above what is needed to complete the purchase are expected to be contributed toward the loan rather than retained by the buyer.

In plain English: if you have more money sitting in your bank account than the scheme requires you to contribute, the lender will apply that excess to reduce your loan balance rather than let you keep it.

This is not a lender being difficult. It is a condition of the scheme itself. The First Home Guarantee is designed for buyers who have not yet reached the traditional 20% deposit threshold. If your total savings exceed what is needed to reach a 95% loan-to-value ratio, the scheme's logic requires those excess funds to be applied to the purchase.

Avenue | By Masscon | Castle Hill NSW | $10K deposit | Secure with $10k and $699 x 93 weeks

What This Looks Like in Practice

A first home buyer recently shared their experience on social media after being caught by this rule with one of Australia's major banks.

Their plan was straightforward. Use the 5% deposit scheme to buy their first home, and keep $20,000 set aside for renovations after settlement. Their broker had not explained the excess savings rule. When settlement came, the bank applied the $20,000 renovation fund to the loan without consulting them. Their loan reduced from $640,000 to $620,000 and their renovation budget disappeared.

The bank's response confirmed it had no choice. Under the scheme guidelines, retaining additional funds above the permitted thresholds after settlement would mean the application no longer met the eligibility requirements. There was no exception available.

The buyer's comment to others was simple: be careful not to have more than a small buffer above what you need to complete the purchase.

Why This Catches Buyers Off Guard

Most first home buyer guides focus on what the scheme gives you, the LMI saving, the 5% deposit, the accessibility. Very few explain the obligations that come with it.

The scheme is designed for buyers who genuinely cannot reach a 20% deposit. If you have been a diligent saver and have more than that threshold in savings, you either need to spend down to the required level before applying, or you may find the lender requires you to apply those funds to the purchase at settlement.

Common situations where buyers get caught:

Renovation funds. Buyers who plan to buy a property needing work often set aside a renovation budget separate from their deposit. Under the scheme, those funds may be treated as additional deposit and applied to the loan.

Emergency buffer. Buyers who want to keep three to six months of living expenses aside as a financial safety net after settlement may find those funds are not theirs to retain under the scheme conditions.

Family gifts received after pre-approval. If a parent gifts money to a buyer after pre-approval is in place but before settlement, that additional money may be treated as excess savings.

Concord Central | By Billbergia | Concord West NSW | $10K deposit | Secure with $10k and $371 x 170 weeks

How to Plan Around It

Talk to your broker before pre-approval, not after. Ask specifically about the excess savings rule and what the maximum savings balance you can hold at settlement without it affecting your loan amount. Different lenders may apply this differently, so understanding your specific lender's approach before you commit is essential.

Time large gifts carefully. If family members are contributing to your purchase, discuss the timing and documentation with your broker before any funds are transferred.

Keep renovation funds separate from your savings trail. Some buyers structure renovation funds in a redraw facility or offset account attached to the loan itself rather than holding them as savings at settlement. This is worth discussing with your broker and conveyancer before settlement day.

Understand what you actually need at settlement. Your conveyancer will provide a final settlement statement showing exactly what is required. Understanding that number well in advance and ensuring your savings balance reflects it accurately removes the risk of a surprise application of funds you had earmarked for something else.

Seek independent advice. The scheme rules are administered by Housing Australia through participating lenders. Each lender interprets and applies the rules according to their own policies. Getting specific advice from a broker who works extensively with the scheme is the only way to understand exactly how it will apply to your situation.

Aeris | Melrose Park NSW | $18K deposit | Secure with $18k and $184 x 100 weeks

The Alternative for Buyers Who Want to Keep Their Savings

For buyers who have meaningful savings beyond the deposit minimum and want to retain them after settlement, the First Home Guarantee Scheme may not be the right structure.

Alternatives worth exploring include saving a larger deposit to reach a higher loan-to-value ratio that eliminates LMI without using the scheme, or using a professional LMI waiver if you work in a qualifying profession.

For buyers who are further from a full deposit and want a structure that does not have the excess savings constraint, Coposit's off-the-plan deposit model works differently. The $10,000 upfront secures the property and the remaining deposit builds through weekly instalments during construction. There is no scheme condition requiring excess savings to be applied at settlement in the same way.

Browse eligible off-the-plan developments on the Coposit projects page, download the app, or contact the team to understand how the deposit structure works for your situation.

This article is general information only and does not constitute financial or legal advice. Scheme rules, lender policies, and eligibility requirements vary and change over time. Always seek independent financial and legal advice before making any property decisions.