The Albanese government’s expanded first-home buyer support has helped many buyers get into the market with small deposits.
First-home buyers who used the Albanese government’s flagship housing support scheme in key capital city areas have been warned there is a high chance they’re repaying a mortgage worth more than their home.
Explosive figures have revealed two in five Sydney properties eligible for the government’s 5 per cent deposit scheme have had value falls exceeding 5 per cent since the program’s expansion in October.
Negative equity risk was even higher in Melbourne, where close to half the properties eligible for the scheme recorded price drops, while in Brisbane it was close to a quarter of properties.
These price falls would be particularly devastating for anyone who bought using the Australian Government 5 per cent Deposit Scheme, as the drop in value would wipe out their deposit, putting them into negative equity.
This home in Sydney suburb Fairfield recently sold for $1.45m, just under the Sydney cap. Dwellings in the city region have fallen in value by an average of 8.1 per cent since October.
It would also mean taxpayers would be on the hook for covering higher losses incurred by lenders in cases where first-home buyers defaulted on their loans – something that’s rarely happened under the scheme to date.
The findings come from a study by property research group SuburbData, which examined all properties selling below the scheme price caps in each capital since the government program was expanded in October.
Properties priced below the new $1.5m price cap in Sydney had some of the largest value falls between October 2025 and August 2026, the SuburbData analysis showed.
An estimated 41.9 per cent of all properties below this price cap lost more than 5 per cent of their value, with the average loss at about $83,000 per property.
SuburbData analyst Jeremy Sheppard said value falls of this magnitude would be problematic for those who used smaller deposits due to the current climate of rising interest rates pressuring household budgets.
With markets expecting an 86 per cent chance of an interest rate hike next week Tuesday and lenders warning of a strong likelihood of two more hikes after that, mortgage holders face steep rises in repayments.
Those who used smaller deposits would get a bigger hit as they held more debt and were usually already charged higher lending rates, Mr Sheppard noted.
“It’s the worst time if you’re in negative equity. You need to cut spending and make sure you don’t sell. Do everything you can to stay in the market,” he said.
“My concern is that people who are on the scheme who are vulnerable, people who have lost their jobs, have limited options.”
A criticism of the policy is that it initially pushed up demand for housing in the lower end of the market, only for prices to then fall. Picture: Jane Dempster
Canstar data insights director Sally Tindall said there has been a surge in borrowers getting into the housing market “with barely any skin in the game”.
She noted $15 billion in owner occupier mortgages had been written with deposits of 5 per cent since the scheme was uncapped in October.
“Buying with a 5 per cent deposit can get you through the front door, but it doesn’t give you much of a safety net once you’re inside,” she said.
“Many of these borrowers, particularly in Sydney and Melbourne, are likely to be in negative equity.”
Government downplayed the negative equity risk, with a spokesman for Housing Minister Clare O’Neil pointing out only 15 claims had been paid out of more than 200,000 guarantees since the scheme’s inception.
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Canstar data insights director Sally Tindall said the number of borrowers with small deposits was well up on previous years. Picture: Tim Hunter.
“That’s less than 0.01 per cent,” he said. “No guarantees have been paid out for people who entered the scheme since its expansion last year.
Labor 5 per cent Deposit Scheme had helped 280,000 first-home buyers get into their own home, saving $2.3 billion in lender’s mortgage insurance costs, according to Ms O’Neil’s office.
“Without the scheme, many first-home buyers would not have got into the market at all,” the spokesman said.
Housing Australia data showed 59 per cent of scheme users since its 2020 inception used deposits larger than 5 per cent.
Shadow Housing Minister Andrew Bragg blasted Labor’s decision to expand the scheme in October, pushing up housing demand, only to then introduce tax changes in the budget that caused prices to fall.
Minister for Housing Clare O’Neil’s office revealed only a fractional number of the guarantees have ever had to be paid out. Picture: Martin Ollman
“They were warned about price hikes and negative equity but they charged ahead anyway,” he said.
Senator Bragg added that 95 per cent mortgages were “pedalled” without any disclosure of coming tax reforms that would impact the housing market such as changes to negative gearing.
“Labor has smashed the housing system,” he said.
NEGATIVE EQUITY HOT SPOTS
One of the Sydney areas with the highest volume of losses was the Strathfield-Burwood-Ashfield region of the inner west, SuburbData indicated.
A total 676 homes in the area traded within the price cap, with the average value falling by $122,000, or 15 per cent.
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Losses were also high across the North Sydney-Mosman area – albeit across a much smaller volume of properties priced under the cap (212) – with the average decline in value at nearly $233,000, or 22.5 per cent.
Cheaper markets such as Mount Druitt, St Marys, Fairfield and Penrith – which have a long history of demand among first-home buyers – also recorded average falls well over 5 per cent.
Mr Sheppard said the expansion of the scheme in October likely boosted buyer demand in the early months, only for prices to then fall after interest rates were hiked and budget reforms were announced in May.
“There has been a clear drop off in demand since May,” he said. “First-home buyers who had already committed to the scheme before May are now bearing the brunt of negative equity. It’s a little unfair.”
George Oduro and Jade McCudden, with kids Nia and Theo, said they were very happy with the scheme as it allowed them to get a home sooner. Picture: Tom Parrish
First-home buyers report they feel the benefits of the scheme outweigh the risks.
Jade McCudden recently accessed the scheme for a Marrickville home she will settle on later this year and said she wouldn’t have been able to buy without it.
“You never know what’s going to happen,” she said. “We realised we could buy now and we could easily afford it. The alternative was waiting years to get a 20 per cent deposit knowing prices could increase.
“We are not concerned because we know we will be in the home for quite a few years and prices will recover … but I understand it’s not for everyone. Maybe it wouldn’t be a good idea if you were mortgaged up to your eyeballs. But for us, we have a beautiful home that’s well within our means in an area we love.”
OPTIONS FOR STRUGGLING MORTGAGE HOLDERS
loan Market-Carlingford mortgage broker Dean Inzitari said using the Australian Government 5 per cent deposit scheme had advantages for a very specific type of buyer.
He said those tempted to use the scheme should be confident they will live in the home for at least five years and can easily afford the repayments. They should also be confident they’re getting a price discount, he said.
“The problem for those who used the scheme before May is they bought when the market was peaking,” he said.
Loan Market broker Dean Inzitari.
“Back in October, people were very bullish about the market, but buyers had the rug pulled from under them with the May budget (reforms).
“That’s not as much of an issue for buyers right now because prices have dropped a lot more. If you can get a big discount on a home you’ll live in for many years, the scheme can be a way to get into the market sooner.”
Mr Inzitari, who has close to two decades of experience sourcing loans for families seeking debt consolidation, refinancing and first-home buyer mortgages, said struggling loan holders had options.
“The first step is to try reduce your expenses,” he said. “Review your energy providers, your insurance, continue to review your mortgage.
“Lenders are also starting to get a bit more competitive because their lodgements are down, so there can still be an opportunity to go to the bank and reduce your rate.
“If you’re on the 5 per cent deposit scheme, you can refinance to other 5 per cent deposit lenders, provided the loan to value ratio has not slipped above 95 per cent.
“If all else fails, you can approach the bank and ask for hardship support, but it’s worth remembering that is does affect your credit score so it should only be a last resort.”