Labor encouraged first-home buyers to enter the property market with deposits as low as 5%. Months later, interest rates were higher, property values were falling in major cities and the Federal Budget introduced measures intended to reduce demand for established properties.

For years, young Australians have been told that getting into the property market is one of the first major steps towards building long-term wealth.

The Albanese Labor Government reinforced that message by expanding the Australian Government 5% Deposit Scheme.

When the changes commenced, I outlined the expanded eligibility, increased property-price caps and ability to purchase without lenders mortgage insurance in my earlier article, First Home Buyer Concessions – What Changed from 1 October 2025.

Those concessions gave more Australians an opportunity to purchase sooner. However, the market and interest-rate environment that followed has exposed the other side of buying with very little equity.

From 1 October 2025, eligible first-home buyers could purchase with a deposit as low as 5%, without paying lenders mortgage insurance. The scheme became uncapped, income limits were removed and property-price caps were increased.

The promise was compelling:

• Stop paying rent
• Buy sooner
• Avoid lenders mortgage insurance
• Start building equity

But there was a major risk hidden beneath the headline.

A 5% deposit does not simply help someone purchase sooner. It also places that buyer into one of the most highly leveraged financial positions they are ever likely to hold.

Labor then delivered a Federal Budget containing measures intended to reduce investor demand for established properties. This occurred after interest rates had already risen and while property values in Sydney and Melbourne were falling.

The result is a serious policy contradiction.

The Government encouraged thousands of Australians to enter the housing market earlier, with minimal equity, before introducing measures that could place further downward pressure on the value of many of the properties they had just purchased.

This does not mean every first-home buyer will lose their home. It does not mean every property will fall by the same amount.

It does mean recent low-deposit purchasers may now be carrying risks that were barely discussed when the scheme was promoted.

Labor Deliberately Brought First-Home Purchases Forward

The expansion of the 5% Deposit Scheme was not merely an administrative change.

Treasury modelling estimated that the policy would result in:

• Approximately 12,900 households bringing forward a purchase they would otherwise have made later
• Approximately 3,100 additional households purchasing when they otherwise may not have done so
• Approximately 10,000 buyers purchasing with greater borrowing capacity because they could avoid lenders mortgage insurance

This matters because the policy did not simply assist people who were already about to buy.

It encouraged households to enter the market sooner and, in many cases, with more debt than they may otherwise have taken on.

The Government promoted the ability to save years of deposit accumulation and avoid potentially tens of thousands of dollars in lenders mortgage insurance.

Those benefits are real.

However, avoiding lenders mortgage insurance does not eliminate risk. It only changes who is protected.

A 5% Deposit Leaves Almost No Room for Error

Consider a first-home buyer purchasing a property for $700,000.

They contribute a 5% deposit of $35,000 and borrow approximately $665,000, excluding acquisition costs.

A buyer in this position is exposed to a simple but powerful mathematical reality:

This illustration ignores the small amount of principal that may have been repaid. It also excludes buying and selling costs.

The owner may therefore become financially trapped before the property technically reaches negative equity.

If the property is worth $672,000 after a 4% fall, the owner appears to retain approximately $7,000 of gross equity.

However, selling-agent commission, marketing costs, conveyancing, mortgage discharge fees and property preparation expenses could easily exceed that amount.

The purchaser may need to contribute cash simply to sell the home and clear the loan.

Sydney Buyers Have Seen Most of a 5% Buffer Placed at Risk

Sydney provides one of the clearest illustrations of the danger facing highly leveraged buyers.

Cotality reported that Sydney dwelling values had fallen materially from their 2026 peak, with further declines recorded through the June quarter.

A first-home buyer whose $700,000 property experienced a 3.7% decline would see its value fall by approximately $25,900.

This buyer may not yet be technically in negative equity.

However, approximately three-quarters of their original deposit has effectively disappeared on paper. Selling costs could consume the remaining equity.

A further decline of approximately 1.3% from the original purchase price would eliminate the original 5% equity buffer, before taking principal repayments and transaction costs into account.

Melbourne Buyers Face the Same Leverage Problem

Melbourne has also experienced weaker property conditions.

For a buyer who purchased a $650,000 Melbourne property with a 5% deposit, a 2.6% decline would have the following effect:

A relatively modest market fall can therefore remove more than half of a first-home buyer’s original equity.

The Budget Then Targeted Demand for Established Properties

The 2026–27 Federal Budget was delivered on 12 May 2026.

Among its housing and tax measures, Labor announced reforms affecting negative gearing and capital gains tax.

Under the announced arrangements, negative gearing concessions would generally be focused on new housing, while the tax treatment of established-property investment would become less attractive for future purchases.

The Government’s stated intention was to reduce investor demand for established properties and redirect more investment towards new housing supply.

There may be a legitimate policy argument for encouraging new construction.

However, reducing demand for established housing has two very different consequences.

• For a person who has not yet purchased, softer prices may improve affordability.
• For someone who has just purchased with a 5% deposit, softer prices immediately reduce their equity.

That is the contradiction.

The cost of that transition does not fall on the Government.

It falls on the recent purchaser.

The Government Stimulated Demand Before Attempting to Suppress It

Treasury acknowledged that expanding the deposit scheme would bring demand forward and place some upward pressure on property prices.

The scheme helped more buyers compete for the available supply of properties before an equivalent increase in housing construction had been delivered.

Some buyers may consequently have:

• Entered the market earlier than originally planned
• Competed against other government-supported purchasers
• Borrowed more because income limits were removed
• Purchased near a local market peak
• Commenced home ownership with very little financial buffer

The Budget then sought to weaken one component of demand for established property.

The two policies pull in opposing directions.

The first increased purchasing capacity and brought transactions forward.

The second seeks to reduce demand and make property more affordable for future buyers.

A future buyer may benefit from this shift.

A recent buyer may be financially damaged by it.

Higher Interest Rates Compounded the Problem

The expanded scheme commenced on 1 October 2025.

During 2026, the Reserve Bank increased the cash rate three times, taking it from 3.60% to 4.35%.

That represents an increase of 0.75 percentage points within approximately seven months of the expanded scheme beginning.

The Reserve Bank is independent and the Government does not directly set interest rates.

It would therefore be inaccurate to claim that the Budget alone caused the rate increases.

However, government fiscal policy and monetary policy do not operate in isolation.

When government spending supports demand during a period of persistent inflation, the Reserve Bank may need to maintain tighter monetary conditions than would otherwise be required.

The fair criticism is not that Labor personally set mortgage rates.

The fair criticism is that the Government promoted highly leveraged home ownership without ensuring that its broader fiscal, housing and supply policies created a sufficiently safe environment for buyers entering with almost no equity buffer.

What Higher Rates Mean for a Real Household

Assume a first-home buyer borrowed $665,000 over 30 years.

An increase in their mortgage rate from 5.75% to 6.50% would lift approximate principal-and-interest repayments from around $3,881 to around $4,203 per month.

That is an increase of approximately:

• $322 per month
• $3,864 per year
• More than $5,500 of gross salary for some taxpayers

The exact result will depend on the lender, mortgage rate, loan term and personal circumstances.

However, the household impact is clear.

Money that could otherwise have been directed towards an emergency fund, superannuation, investments, childcare, parental leave or additional repayments must instead be used to service the loan.

At the same time, the property securing that loan may be falling in value.

The Roll-On Effect for Recent First-Home Buyers

1. Refinancing Becomes Harder

A homeowner who borrowed at a 95% loan-to-value ratio may have expected rising values and principal repayments to eventually bring the loan below 80%.

Once below 80%, they may have access to more competitive rates and a wider range of lenders.

Falling property values delay that milestone.

The buyer may become trapped with their current lender and be unable to access better refinancing offers.

2. The Household Loses Financial Flexibility

A buyer with little or no equity may struggle to move because of:

• A better employment opportunity
• A growing family
• Separation or divorce
• Caring responsibilities
• Health problems
• Changes in schooling needs

Selling may require the owner to contribute additional cash to clear the mortgage.

3. Wealth Accumulation Is Delayed

A recent buyer may have planned to build equity, commence investing and increase superannuation contributions.

Instead, higher repayments and declining values may force the household to spend its first years rebuilding the deposit it has effectively lost.

Money that could have created diversified wealth remains concentrated in one highly leveraged property.

Building wealth should involve more than relying on the value of one property. A properly structured financial plan considers debt reduction, cash reserves, insurance, superannuation and diversified investments together.

I discuss this broader approach in Plan, Save, Succeed: The Role of a Gold Coast Financial Planner in Wealth Management.

4. Debt Recycling May Be Postponed

Debt recycling generally relies on usable home equity, sustainable cash flow and the capacity to accept investment risk.

A homeowner whose loan remains near 90% or 95% of their property value may be unable to establish a prudent debt-recycling strategy for many years.

This can delay the point at which the household begins converting non-deductible home-loan debt into investment debt and building assets outside the family home.

For a detailed explanation of the strategy, including its risks and the importance of available equity, read Unlocking the Potential of Debt Recycling: A Guide for Gold Coast Homeowners.

5. Parental Leave Becomes More Difficult

Many first-home buyers purchase shortly before starting a family.

A mortgage that has increased by several hundred dollars each month can make it harder for one parent to reduce working hours or take extended parental leave.

The financial impact can therefore alter major family decisions.

6. Emergency Savings May Be Depleted

Buyers entering with a 5% deposit may already have used most of their savings at settlement.

They may still need to fund:

• Conveyancing
• Removal costs
• Rates and insurance
• Urgent repairs
• Furniture
• Body corporate fees
• Unexpected maintenance

If repayments then increase, the household may rely on credit cards or personal loans to meet unexpected expenses.

7. Mortgage Stress Can Affect Retirement Savings

Younger homeowners may respond to cash-flow pressure by reducing salary sacrifice or voluntary superannuation contributions.

A short-term mortgage problem may therefore create a long-term retirement shortfall.

8. A Forced Sale Can Crystallise the Loss

A temporary property decline may be manageable for an owner who can continue making repayments and hold the property for the long term.

The greatest danger arises when the owner is forced to sell because of:

• Redundancy
• Illness or disability
• Relationship breakdown
• The death of a partner
• Unaffordable repayments
• Business failure
• Relocation

Once the property is sold, a paper loss becomes permanent.

A Realistic Forced-Sale Example

Consider a couple who purchased a Sydney apartment for $750,000 with a 5% deposit of $37,500.

Their approximate starting mortgage is $712,500.

Assume the property declines by 3.7%.

If total selling and discharge costs were approximately 2.5% of the sale price, those costs would be around $18,056.

The couple could face a shortfall of more than $8,000, even before allowing for any difference between the estimated property value and the final sale price.

They may have:

• Lost their entire deposit
• Paid months of mortgage interest
• Paid acquisition and moving costs
• Paid selling costs
• Ended up without a home and with residual debt

This is not a prediction for every purchaser.

It is a realistic illustration of how little protection a 5% deposit can provide when several adverse events occur at once.

What Recent Buyers Should Be Concerned About

Their Current Loan-to-Value Ratio

Owners should not assume their property is still worth what they paid.

They should obtain a realistic current valuation and compare it with the outstanding mortgage balance.

Their Emergency Cash Reserve

A highly leveraged household should maintain a meaningful emergency buffer.

The appropriate amount will depend on employment security, expenses, insurance and family circumstances.

Their Ability to Withstand Further Rate Increases

Borrowers should understand what their repayments would look like if their mortgage rate rose by another 1% or 2%.

Their Personal Insurance

A large mortgage supported by two incomes can quickly become unaffordable if one income stops.

Appropriate life, total and permanent disability and income protection insurance should be considered as part of the household’s broader financial strategy.

Their Refinancing Pathway

Owners should understand what property value and loan balance would be required to reach an 80% loan-to-value ratio.

Their Expected Holding Period

Anyone expecting to sell within the next three to five years may face significantly more risk than someone planning to hold the property for the long term.

What the Government Should Have Done Better

Helping first-home buyers enter the market is a legitimate policy objective.

However, a responsible housing strategy should not focus only on reducing the deposit hurdle.

It should also address:

• Housing supply
• Construction capacity
• Infrastructure
• Planning delays
• Household debt sustainability
• Financial education
• Emergency savings
• Income protection

A scheme that increases purchasing power before housing supply responds may place upward pressure on prices.

A later policy designed to reduce prices may then disadvantage the very people who purchased under the earlier scheme.

The Government should have been clearer that:

• A smaller deposit means greater financial risk
• A government guarantee does not protect the buyer
• Property values can fall
• Refinancing may become difficult
• Buying sooner is not always financially better

The Labor Government’s Central Policy Failure

Labor’s policy failure is not that it tried to help first-home buyers.

It is that it treated entering the market as the goal, rather than helping households become financially secure homeowners.

The 5% Deposit Scheme brought purchases forward and encouraged greater leverage.

The Budget then introduced measures intended to reduce demand for established properties.

The Reserve Bank simultaneously tightened monetary policy to address inflation.

Each policy may have its own stated rationale.

Together, they create a dangerous environment for recent purchasers who have little equity and limited capacity to absorb financial shocks.

The Government gained political support by promising to help Australians buy sooner.

However, once those buyers entered the market, they assumed:

• The mortgage risk
• The interest-rate risk
• The property-price risk
• The employment risk
• The long-term wealth consequences

Final Thoughts

Home ownership remains an important and potentially powerful component of long-term wealth creation.

A temporary market decline does not automatically make purchasing a home a mistake.

People who retain stable employment, continue making repayments and hold quality property over the long term may recover from short-term price falls.

The important thing is to avoid making major financial decisions based purely on fear or short-term market movements. A sound strategy should consider the household’s cash flow, debt, emergency reserves, insurance and long-term goals together.

My article, The Value of a Financial Adviser: More Than Just Returns, explains why financial advice is about risk management, structure and disciplined decision-making, not simply chasing investment returns.

Government policy should be judged not only by how many people it helps enter the market.

It should also be judged by whether those people are placed in a financially sustainable position once they get there.

Labor encouraged first-home buyers to enter the property market with deposits as low as 5%.

Treasury knew the policy would bring purchases forward and increase borrowing capacity.

Months later, interest rates had increased and the Government delivered Budget measures intended to reduce demand in the established-property market.

For a Sydney purchaser whose property experienced a 3.7% decline, approximately 74% of an initial 5% equity buffer may have already been erased.

That buyer may not yet be formally underwater.

But after selling costs, they may already be unable to exit without contributing additional cash.

For some recent first-home buyers, the first stage of their wealth-creation journey may now involve rebuilding the deposit they believed had already established their financial future.

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Important information

This article contains general information only and does not take into account any person’s objectives, financial situation or needs. Property values, loan terms, tax outcomes and personal circumstances differ. Before acting, consider obtaining personalised financial, credit, tax and legal advice from appropriately qualified professionals.