When a 5% home deposit becomes a 95% risk

Market insight · First home buyers

The negative equity trap — when a 5% deposit becomes a 95% risk

Canberra counts how many first home buyers get in. Nobody is counting what happens to them next.

By Alan Weiss · October 2026

For years the housing debate has asked one question: how do we get first home buyers into the market? It is time to ask a second. What happens to them once they are in?

On 1 October 2025 the Federal Government expanded its 5% Deposit Scheme. Income caps went. Places became unlimited. Price caps rose. In the twelve months since, 102,594 first home buyers have used it — 28,158 of them in New South Wales. The Government says about one in two first home buyers now purchases with a government scheme behind them.

That is a remarkable number. The one that deserves equal attention is smaller: 5%.

The arithmetic

Take a Sydney apartment bought for $1 million. The buyer contributes $50,000 and borrows $950,000. Leave purchase costs aside and their equity on day one is 5%.

If the value falls 5%, the buffer is gone. If it falls 7%, the apartment is worth $930,000 and — allowing for the little principal repaid in the early years — the owner owes more than the property would fetch. That is negative equity.

It is no longer hypothetical. National home values are 5.2% below their March peak. Sydney is 8.6% below its February peak. Either fall is larger than a 5% deposit.

What the Reserve Bank said

The RBA’s October 2026 Financial Stability Review is measured. Australia’s mortgage market remains strong. Fewer than 1% of borrowers are estimated to be in negative equity. There is no crisis.

Then comes the qualification. Recent purchasers and borrowers with high loan-to-value mortgages are more likely to be in negative equity — and the Bank names first home buyers in the 5% Deposit Scheme among them. The Bank chose to name the scheme. That is worth noticing.

Then rates moved

When the expanded scheme opened, the cash rate was 3.60%. Today it is 4.60%, after four increases this year. On a $950,000 loan over 30 years, each quarter-point adds roughly $155 a month. Four of them add a little over $600.

So the buyer with the thinnest buffer faces two pressures at once — dearer debt, and a cheaper asset securing it.

The Government helps the buyer obtain 95% finance. It does not guarantee their 5%.

What the guarantee guarantees

A first home buyer hears “government guarantee” and understandably assumes the purchase is protected. It isn’t. The guarantee lets an eligible buyer borrow 95% without paying lenders mortgage insurance. The Commonwealth covers part of the lender’s exposure. It does not cover the buyer’s deposit, the property’s value, or the price at which the owner can later sell.

Negative equity is not foreclosure

The distinction matters. An owner with a secure income, a manageable repayment and no plan to move for five or ten years can sit in negative equity and never feel it. Markets move in cycles. The loan reduces. Equity rebuilds.

The trouble starts when life intervenes — a separation, a job loss, illness, an interstate transfer, a second child. Now the owner must sell. If they owe $950,000 and the market offers $900,000, the sale does not clear the debt, and selling costs come on top. The RBA notes that low or negative equity makes it harder for stressed borrowers to sell, and is associated with a greater likelihood of arrears ending in foreclosure.

The other side of the ledger

None of this means the scheme has failed. The Government reports 99% of scheme borrowers are ahead or on track with repayments, and only 13 guarantee claims have been paid since it began. The RBA says arrears among participants remain contained. Borrowers were assessed with APRA’s serviceability buffer, well above the rate they were offered.

First home buyers are not defaulting in their thousands. But default is not the only measure that matters.

Measure equity, not just entry

If we celebrate how many people were helped in, we should also publish where they now stand. How many have less than 5% equity? How many have none? How many could refinance today, or sell and clear the mortgage? And how do they compare with buyers who came in with 10% or 20%?

A lower deposit does not make housing cheaper. It changes the financing. In a rising market that works spectacularly — a 10% rise on $1 million is $100,000 of equity on a $50,000 stake. Leverage works both ways.

Helping someone buy a property and helping someone build sustainable home ownership are not the same thing.

I have sold property in the Eastern Suburbs through every cycle since 1990. The owners who came through the falls best were rarely the cleverest buyers. They were the ones who never had to sell.

A 5% deposit solves the problem of getting in. The question for policymakers now is whether, for some buyers, it has replaced a deposit problem with a 95% debt problem.