diff --git a/e2e-tests/development-runtime/cypress/integration/hot-reloading/gatsby-browser.js b/e2e-tests/development-runtime/cypress/integration/hot-reloading/gatsby-browser.js
new file mode 100644
index 0000000000000..f1007cde510df
--- /dev/null
+++ b/e2e-tests/development-runtime/cypress/integration/hot-reloading/gatsby-browser.js
@@ -0,0 +1,24 @@
+const TEST_ID = `gatsby-browser-hmr`
+
+describe(`hot reloading above page template (gatsby-browser)`, () => {
+  beforeEach(() => {
+    cy.visit(`/`).waitForRouteChange()
+  })
+  it(`displays placeholder content on launch`, () => {
+    cy.getTestElement(TEST_ID).should(
+      `contain.text`,
+      `%TEST_HMR_IN_GATSBY_BROWSER%`
+    )
+  })
+
+  it(`hot reloads with new content`, () => {
+    const text = `HMR_IN_GATSBY_BROWSER_WORKS`
+    cy.exec(
+      `npm run update -- --file src/wrap-root-element.js --replacements "TEST_HMR_IN_GATSBY_BROWSER:${text}"`
+    )
+
+    cy.waitForHmr()
+
+    cy.getTestElement(TEST_ID).should(`contain.text`, text)
+  })
+})
diff --git a/e2e-tests/development-runtime/gatsby-browser.js b/e2e-tests/development-runtime/gatsby-browser.js
index 1709cf2c75113..d8a65b3cc6595 100644
--- a/e2e-tests/development-runtime/gatsby-browser.js
+++ b/e2e-tests/development-runtime/gatsby-browser.js
@@ -1,4 +1,5 @@
-const Wrapper = require(`./src/wrap-root-element`).default
+import WrapRootElement from "./src/wrap-root-element"
+import * as React from "react"
 
 if (typeof window !== `undefined`) {
   window.___PageComponentLifecycleCallsLog = []
@@ -11,16 +12,17 @@ const addLogEntry = (action, location) => {
   })
 }
 
-exports.onPreRouteUpdate = ({ location }) => {
+export const onPreRouteUpdate = ({ location }) => {
   addLogEntry(`onPreRouteUpdate`, location)
 }
 
-exports.onRouteUpdate = ({ location }) => {
+export const onRouteUpdate = ({ location }) => {
   addLogEntry(`onRouteUpdate`, location)
 }
-
-exports.onPrefetchPathname = ({ pathname }) => {
+export const onPrefetchPathname = ({ pathname }) => {
   addLogEntry(`onPrefetchPathname`, pathname)
 }
 
-exports.wrapRootElement = Wrapper
+export const wrapRootElement = ({ element }) => (
+  <WrapRootElement element={element} />
+)
diff --git a/e2e-tests/development-runtime/src/wrap-root-element.js b/e2e-tests/development-runtime/src/wrap-root-element.js
index fb0a02975b6d9..a15637a9d2710 100644
--- a/e2e-tests/development-runtime/src/wrap-root-element.js
+++ b/e2e-tests/development-runtime/src/wrap-root-element.js
@@ -22,6 +22,9 @@ const WrapRootElement = ({ element }) => (
         <div>
           StaticQuery in wrapRootElement test (should show site title):
           <span data-testid="wrap-root-element-result">{title}</span>
+          <div data-testid="gatsby-browser-hmr">
+            %TEST_HMR_IN_GATSBY_BROWSER%
+          </div>
         </div>
       </>
     )}
diff --git a/packages/gatsby/cache-dir/app.js b/packages/gatsby/cache-dir/app.js
index 3676dd72be5e0..569cdb9d751e3 100644
--- a/packages/gatsby/cache-dir/app.js
+++ b/packages/gatsby/cache-dir/app.js
@@ -13,16 +13,15 @@ import asyncRequires from "$virtual/async-requires"
 // Generated during bootstrap
 import matchPaths from "$virtual/match-paths.json"
 import { LoadingIndicatorEventHandler } from "./loading-indicator"
-
+import Root from "./root"
+import { init as navigationInit } from "./navigation"
 // ensure in develop we have at least some .css (even if it's empty).
 // this is so there is no warning about not matching content-type when site doesn't include any regular css (for example when css-in-js is used)
 // this also make sure that if all css is removed in develop we are not left with stale commons.css that have stale content
 import "./blank.css"
 
-// Enable fast-refresh for virtual sync-requires
-module.hot.accept(`$virtual/async-requires`, () => {
-  // Manually reload
-})
+// Enable fast-refresh for virtual sync-requires and gatsby-browser
+module.hot.accept([`$virtual/async-requires`, `./api-runner-browser`])
 
 window.___emitter = emitter
 
@@ -160,8 +159,8 @@ apiRunnerAsync(`onClientEntry`).then(() => {
     loader.loadPage(`/404.html`),
     loader.loadPage(window.location.pathname),
   ]).then(() => {
-    const preferDefault = m => (m && m.default) || m
-    const Root = preferDefault(require(`./root`))
+    navigationInit()
+
     domReady(() => {
       if (dismissLoadingIndicator) {
         dismissLoadingIndicator()
diff --git a/packages/gatsby/cache-dir/root.js b/packages/gatsby/cache-dir/root.js
index 95e541de4084b..09220ca79fcf7 100644
--- a/packages/gatsby/cache-dir/root.js
+++ b/packages/gatsby/cache-dir/root.js
@@ -2,19 +2,13 @@ import React from "react"
 import { Router, Location, BaseContext } from "@reach/router"
 import { ScrollContext } from "gatsby-react-router-scroll"
 
-import {
-  shouldUpdateScroll,
-  init as navigationInit,
-  RouteUpdates,
-} from "./navigation"
+import { shouldUpdateScroll, RouteUpdates } from "./navigation"
 import { apiRunner } from "./api-runner-browser"
 import loader from "./loader"
 import { PageQueryStore, StaticQueryStore } from "./query-result-store"
 import EnsureResources from "./ensure-resources"
 import FastRefreshOverlay from "./fast-refresh-overlay"
 
-navigationInit()
-
 // In gatsby v2 if Router is used in page using matchPaths
 // paths need to contain full path.
 // For example:
@@ -103,7 +97,7 @@ const Root = () => (
 )
 
 // Let site, plugins wrap the site e.g. for Redux.
-const WrappedRoot = apiRunner(
+const rootWrappedWithWrapRootElement = apiRunner(
   `wrapRootElement`,
   { element: <Root /> },
   <Root />,
@@ -112,8 +106,12 @@ const WrappedRoot = apiRunner(
   }
 ).pop()
 
-export default () => (
-  <FastRefreshOverlay>
-    <StaticQueryStore>{WrappedRoot}</StaticQueryStore>
-  </FastRefreshOverlay>
-)
+function RootWrappedWithOverlayAndProvider() {
+  return (
+    <FastRefreshOverlay>
+      <StaticQueryStore>{rootWrappedWithWrapRootElement}</StaticQueryStore>
+    </FastRefreshOverlay>
+  )
+}
+
+export default RootWrappedWithOverlayAndProvider
diff --git a/packages/gatsby/src/utils/webpack-utils.ts b/packages/gatsby/src/utils/webpack-utils.ts
index 53c973731133d..47ecafe3f96f6 100644
--- a/packages/gatsby/src/utils/webpack-utils.ts
+++ b/packages/gatsby/src/utils/webpack-utils.ts
@@ -731,13 +731,32 @@ export const createWebpackUtils = (
     }
   ): CssMinimizerPlugin => new CssMinimizerPlugin(options)
 
-  plugins.fastRefresh = (): Plugin =>
-    new ReactRefreshWebpackPlugin({
+  plugins.fastRefresh = ({ modulesThatUseGatsby }): Plugin => {
+    const regExpToHack = /node_modules/
+    regExpToHack.test = (modulePath: string): boolean => {
+      // when it's not coming from node_modules we treat it as a source file.
+      if (!vendorRegex.test(modulePath)) {
+        return false
+      }
+
+      // If the module uses Gatsby as a dependency
+      // we want to treat it as src because of shadowing
+      return !modulesThatUseGatsby.some(module =>
+        modulePath.includes(module.path)
+      )
+    }
+
+    return new ReactRefreshWebpackPlugin({
       overlay: {
         sockIntegration: `whm`,
         module: path.join(__dirname, `fast-refresh-module`),
       },
+      // this is a bit hacky - exclude expect string or regexp or array of those
+      // so this is tricking ReactRefreshWebpackPlugin with providing regexp with
+      // overwritten .test method
+      exclude: regExpToHack,
     })
+  }
 
   plugins.extractText = (options: any): Plugin =>
     new MiniCssExtractPlugin({
diff --git a/packages/gatsby/src/utils/webpack.config.js b/packages/gatsby/src/utils/webpack.config.js
index af93ae208e58c..18b21a4e15e3b 100644
--- a/packages/gatsby/src/utils/webpack.config.js
+++ b/packages/gatsby/src/utils/webpack.config.js
@@ -216,7 +216,7 @@ module.exports = async (
       case `develop`: {
         configPlugins = configPlugins
           .concat([
-            plugins.fastRefresh(),
+            plugins.fastRefresh({ modulesThatUseGatsby }),
             plugins.hotModuleReplacement(),
             plugins.noEmitOnErrors(),
             plugins.eslintGraphqlSchemaReload(),