Following the RBA's decision on 5 May 2026 to raise the official cash rate to 4.35%, entering the property market with a small deposit requires more careful planning than at any point in the past two years. There are still clear pathways available for first home buyers in 2026. Understanding how the current rate environment affects your borrowing power, your repayments and your options is essential. 

What Is a Low Deposit Home Loan?

A low deposit home loan allows you to purchase property with less than the standard 20% deposit. Most mainstream lenders will consider applications with a 5% deposit. Through government-backed guarantee schemes, eligible buyers can borrow with as little as 2 to 5% without paying lenders mortgage insurance (LMI).

Without government support, borrowing above 80% of the property's value triggers LMI, which is insurance that protects the lender if you default. LMI costs the borrower between $5,000 and $30,000 or more depending on loan size and LVR. 

The May 2026 RBA Decision and What It Means for First Home Buyers

On 5 May 2026, the Reserve Bank of Australia raised the official cash rate by 25 basis points to 4.35%. This was the third consecutive hike in 2026, following increases in February and March, and represents 75 basis points of hikes since the start of the year. The decision was made by eight members to one.

The RBA's official statement noted that inflation is likely to remain above target for some time and that risks remain tilted to the upside. CBA economists expect rates to remain on hold for the remainder of 2026, with potential for cuts in 2027, though a further hike before year end cannot be ruled out depending on inflation and employment data.

The combined effect of three hikes in 2026 has increased minimum monthly repayments by approximately $270 on a $500,000 loan compared to January 2026, or more than $3,200 per year. For first home buyers planning their budget, all calculations must be based on the current cash rate of 4.35% and the APRA assessment rate of approximately 7.35%. Any figures based on 2025 rates will understate your repayment obligations. 

How Much Deposit Do You Actually Need in May 2026? 

 

Your deposit is just the starting point. You also need funds for stamp duty, legal fees, building inspection and loan establishment charges, typically adding a further 2 to 5% of the purchase price. With rates at 4.35%, budget conservatively and include a repayment buffer for any further movements in the cash rate. 

How Low Deposit Home Loans Work

A low deposit home loan functions like any standard mortgage. You borrow the purchase price minus your deposit and repay principal and interest over the loan term. The key difference is your starting LVR. At a 5% deposit, you are borrowing 95 cents for every dollar of property value.

At the current cash rate of 4.35%, with variable rates broadly in the 6.5% to 7% range for most borrowers, repayments on a high-LVR loan are materially higher than they were twelve months ago. A 95% LVR borrower also has less equity buffer if property values soften under the weight of higher rates. These two factors make choosing the right loan structure and lender for a high-LVR application more important now than at any point in recent years. 

What Do the May 2026 Repayment Changes Look Like?

Following three 2026 hikes totaling 75 basis points, here is the cumulative impact on repayments across different loan sizes, comparing January 2026 rates to the current post-May 2026 position. 

 

The May 2026 hike alone adds approximately $90 to $100 per month on a $600,000 loan. All major banks are passing on the full increase to variable rate customers, with most announcing changes within 48 hours of the RBA decision and applying them within one to two weeks. 

Government Schemes That Help You Buy in 2026

First Home Guarantee

The federal government's First Home Guarantee allows eligible first home buyers to purchase with just a 5% deposit and no LMI. The government acts as guarantor for up to 15% of the purchase price. In the current rate environment, eliminating LMI saves you a significant upfront cost and reduces the total amount you need to borrow, which improves your serviceability position at the 7.35% assessment rate.

Eligibility: Australian citizens and permanent residents who are genuine first home buyers, with income under $125,000 per year for singles or $200,000 for couples. Property price caps apply by state and region. Confirm current caps with your adviser. Annual places are limited.

Family Home Guarantee

Designed for eligible single parents, including those who have previously owned property, the Family Home Guarantee allows purchase with as little as a 2% deposit with the government guaranteeing up to 18% of the purchase price. At the current 4.35% cash rate, minimising the amount borrowed through a smaller LVR is particularly valuable because it directly reduces your monthly repayment obligations.

Regional First Home Buyer Guarantee

For eligible buyers purchasing in a designated regional area, this scheme offers 5% deposit with no LMI. In 2026, with repayments elevated across all loan sizes, regional markets with lower median property prices provide a meaningful affordability advantage and this scheme supports buyers accessing them.

Help to Buy Scheme

The government's shared equity scheme allows the government to co-purchase a portion of your home, contributing up to 40% of the price for new homes or 30% for existing properties. Reducing your loan size through shared equity directly reduces your monthly repayment at the current 4.35% cash rate. Confirm current status and eligibility thresholds with your adviser. 

Guarantor Home Loans at the Current Cash Rate

If parents or close family members own property with available equity, a guarantor arrangement allows you to purchase without a cash deposit and without paying LMI. The guarantor provides a legally binding commitment using their property equity as additional security.

In the current rate environment, a guarantor arrangement that eliminates LMI and reduces your total loan size has a compounding benefit: every dollar not borrowed is a dollar on which you are not paying the current loan rate of approximately 6.5% to 7%. The monthly repayment saving from a smaller loan amount is more meaningful when rates are elevated.

Both parties require independent legal advice before proceeding. The guarantor is liable if you cannot meet repayments. 

Borrowing Power After the May 2026 Hike

With the RBA cash rate now at 4.35% and APRA's 3% serviceability buffer, lenders are currently assessing all borrowers at approximately 7.35%. This is the most demanding assessment rate since late 2023 and materially reduces maximum borrowing amounts compared to where they were during the 2025 cutting cycle.

Market pricing as at May 2026 reflects expectations of the cash rate reaching 4.70% by end of 2026. If this materialises, the APRA assessment rate would rise to approximately 7.70%, reducing borrowing capacity further. Budget at the current 7.35% assessment rate and build in a buffer of at least another 0.5% above that. 

Pros and Cons of Low Deposit Home Loans in May 2026

Advantages

• Enter the property market without waiting years to save a full 20% deposit

• Start building equity and benefiting from property value growth from settlement day

• Government schemes eliminate LMI for eligible buyers, reducing both upfront cost and total loan size

• Break free from renting, where every payment builds a landlord's wealth rather than your own

• Access the same loan features as standard home loans, including offset accounts, redraw and extra repayments

Considerations at the 4.35% Cash Rate

• Three hikes in 2026 have already increased repayments significantly. The May hike adds approximately $90 to $100 per month on a $600,000 loan.

• LMI adds significant upfront cost for loans outside government schemes and must be factored into your total purchase budget

• Starting with high LVR leaves less equity buffer if property values soften under the weight of higher interest rates

• The APRA assessment rate of approximately 7.35% means some buyers who qualified at 2025 rates may need to adjust their price range in 2026

• Market pricing suggests the cash rate could reach 4.70% by year end, adding further repayment pressure. Build a buffer into your budget now. 

What Lenders Look for in a Low Deposit Application in May 2026

• Stable income and employment, with at least 6 to 12 months in your current role

• Genuine savings held in your own name for at least 3 months before application

• Clean credit file with no defaults, missed payments or excessive recent enquiries

• A total debt-to-income ratio below 6x, which is increasingly scrutinised following three consecutive hikes

• Demonstrated capacity to service the loan at the 7.35% assessment rate, not just the advertised variable rate 

Genuine Savings Requirements

 

 

How Rate Reset Australia Helps Low Deposit Buyers in 2026

Following three consecutive rate hikes in 2026, navigating government guarantee schemes, LMI waivers, genuine savings rules, guarantor arrangements and lender-specific policies requires careful, current knowledge of what lenders are actually approving at the 4.35% cash rate.

Our Home Loan Reset Review for first home buyers maps out every pathway available for your specific situation including your income, savings, state, property type and family circumstances, and identifies the most financially sound route into your first home. We ensure your borrowing capacity is accurately calculated at the current 7.35% assessment rate so there are no surprises at application stage.