A 15-year-old terrorism suspect has been granted bail by a Supreme Court judge because of the boy's deteriorating mental health in prison.

The boy, who appeared before court via video link on Thursday, was the the youngest of five Sydney males arrested on December 10 after police counter-terrorism raids.

The five were charged with conspiracy to prepare a terrorist act and each faces life in prison if convicted.

The boy, from Georges Hall in Sydney's west, was refused bail in December, a decision that was affirmed in a Children's Court review that month.

The police prosecutor at the first bail hearing said the boy's phone was found to contain images of Islamic State propaganda after it was seized in raids the December before. The boy had also allegedly used code words in discussing firearms in text messages.

"I'm going to get to paradise through banana," the boy allegedly said to a man now in prison facing the same terrorism conspiracy charge. His fingerprints were allegedly found on plans seized in the December 2014 raids.

Justice Michael Adams on Thursday found the boy posed a "slight" risk to the community.

"The problem is posed by the extremist ideology which underlies these charges, the disregard of that ideology for the rights of ordinary people to go about their lives without fear," he said.

But he noted the boy's youth at the time of the alleged conspiracy and his lack of contact with his co-accused.

"It's a significant feature of his case that he was involved with and I suspect inveigled by much older persons with whom he has not had contact for a year and it is possible to ensure he does not have contact with again," he said.

Justice Adams found there was a risk the boy's mental health would continue to decline in jail because of the detention itself, rather than a lack of care.

He granted bail on the condition the boy wear an electronic tracking bracelet and only leave home accompanied by his mother or father. This was after submissions by police in an affidavit that they lacked the resources to properly monitor such a bracelet.

The boy was also required to report daily to a police station, obey a curfew and have no access to the internet. His family will forfeit a $750,000 surety plus $100,000 in cash if he breaks any bail conditions.

On hearing the decision, members of the family cried and clasped hands. The boy's father pointed his finger in the air as he smiled at his son on the video screen.

The boy will next appear before court in February.