Buying a first home is a major financial milestone, but entering the property market with a small deposit can leave buyers vulnerable when property values decline.

Australia’s 5% deposit scheme is designed to help eligible first home buyers purchase a property sooner without saving a traditional 20% deposit. However, when buyers borrow a large proportion of a property’s value, even a modest price decline can significantly reduce their equity.

In this episode of The CEO Breakdown, John Saade, CEO of Latitude Accountants, discusses the financial pressures facing Australians who purchased property near market highs, including younger buyers who entered the market with smaller deposits. With falling house prices, higher mortgage repayments and tighter lending conditions adding to household stress, understanding the risks of borrowing at the edge of affordability has become increasingly important.

The scheme can help eligible buyers achieve homeownership, but understanding the long-term financial commitment is essential before making a purchase.

What Is Australia’s 5% Deposit Scheme?

Australia’s 5% deposit scheme helps eligible first home buyers purchase a home with a deposit of as little as 5% of the property’s purchase price, subject to the applicable programme rules.

Under the Australian Government’s Home Guarantee Scheme, eligible participants can access a home loan with a smaller deposit without paying lenders mortgage insurance, provided they meet the relevant requirements and obtain an eligible loan.

This can help buyers who have a steady income but struggle to save a large deposit while paying rent and managing everyday expenses.

However, a smaller deposit also means a larger mortgage relative to the property’s value.

Why Does a Smaller Deposit Increase Financial Risk?

Consider a property purchased for $900,000 with a 5% deposit.

• Purchase price: $900,000
• Deposit: $45,000
• Initial mortgage: $855,000

The buyer begins with $45,000 in gross property equity, before accounting for purchasing costs and other adjustments.

If the property’s market value falls, that initial equity can disappear quickly because the mortgage does not automatically decrease when the property’s value declines.

This is particularly important for first home buyers who have limited savings remaining after settlement.

How Can Falling House Prices Lead to Negative Equity?

Negative equity occurs when the outstanding home loan is greater than the property’s current market value.

For example, a buyer who borrows $855,000 to purchase a $900,000 property could face negative equity if the property loses sufficient value before the mortgage balance falls.

The following example assumes the mortgage balance remains unchanged to isolate the effect of a property price decline.

Illustrative figures only. Actual equity depends on the outstanding loan balance, repayments, property value and other costs.

The example demonstrates how quickly a small initial deposit can be erased by falling property prices. Selling expenses and other transaction costs could further worsen the buyer’s financial position.

Why Are First Home Buyers Vulnerable During a Housing Downturn?

First home buyers using a small deposit may have less financial flexibility than homeowners who have accumulated equity over several years.

1. Limited Equity Provides a Smaller Financial Buffer

A buyer with a 20% deposit starts with a larger equity position than someone purchasing the same property with a 5% deposit, all else being equal.

When property prices fall, the buyer with less initial equity reaches negative equity sooner.

2. Higher Interest Rates Increase Mortgage Repayments

Rising interest rates can increase repayments on variable-rate home loans, placing additional pressure on household budgets.

Even buyers who can comfortably afford their repayments when purchasing may struggle if interest rates rise alongside electricity bills, groceries, insurance and other living expenses.

3. Refinancing May Become More Difficult

Refinancing is not guaranteed, even for borrowers who have consistently made their repayments.

Lenders generally assess income, expenses, existing debts and the borrower’s ability to service the proposed loan. Falling property values can also affect the lender’s assessment of the security.

If a borrower’s income is insufficient under current lending criteria, moving to a different loan may not be possible on acceptable terms.

4. Selling May Not Cover the Outstanding Mortgage

If a property falls into negative equity, selling it may not generate enough money to repay the outstanding home loan and selling costs.

The borrower may need to contribute additional funds to complete the sale or negotiate an arrangement with their lender.

Negative equity does not automatically mean a homeowner must sell, but it can make moving, refinancing and managing financial hardship more complicated.

<WritingBlock id=”62482″ variant=”document”>## Does the 5% Deposit Scheme Make Buying a Home More Affordable?

The scheme reduces the amount buyers need to save before purchasing a property, but it does not necessarily make the property itself cheaper.

Under the expanded Australian Government 5% Deposit Scheme, eligible first home buyers can purchase with a minimum 5% deposit, with no income caps or place limits under the current programme settings. The government guarantee helps participating lenders provide eligible loans without lenders mortgage insurance. Buyers must still meet lender requirements and remain responsible for their mortgage repayments. <Link url=”https://firsthomebuyers.gov.au/australian-government-5-percent-deposit-scheme” title=”Official scheme details”/>.

For buyers, the distinction is important:

• Lower upfront costs: A smaller deposit can help buyers enter the market sooner.
• Larger loan balance: Borrowing a greater proportion of the property’s value means more debt to repay.
• Ongoing repayment obligations: Buyers must be able to manage repayments alongside everyday living costs.
• Exposure to price movements: A decline in property value can eliminate a small initial equity position.

The scheme can provide a pathway to homeownership, but buyers should assess whether the property and mortgage remain affordable if their financial circumstances change.

How Can First Home Buyers Reduce Their Financial Risk?

Buying a property with a small deposit does not automatically lead to negative equity or financial hardship. Careful planning can help buyers prepare for unexpected changes.

Build a Realistic Household Budget

Before purchasing, calculate the full cost of owning a property, including:

• Mortgage repayments at the proposed interest rate.
• Potential repayment increases if interest rates rise.
• Council rates, insurance and maintenance.
• Utilities and other household expenses.
• Strata levies where applicable.
• Emergency savings for unexpected expenses.

A mortgage that is technically affordable under current conditions may become difficult to manage when other costs increase.

Keep an Emergency Fund

Using every available dollar for a deposit can leave new homeowners with little protection against unexpected expenses.

Where possible, maintain savings after settlement to cover essential costs, temporary income loss and urgent repairs.

Avoid Borrowing at the Limit

Just because a lender approves a particular loan amount does not mean borrowing the maximum is the best decision.

Buyers should consider a repayment level that leaves room in their budget for future changes rather than relying on optimistic assumptions about income growth or property appreciation.

Understand the Long-Term Commitment

Property ownership often involves a long holding period, and short-term price declines do not necessarily determine the eventual outcome.

However, buyers who may need to relocate, sell quickly or refinance should consider how falling prices could affect their options.

What Should Buyers Do If Their Property Falls in Value?

If a property’s market value declines after purchase, the first step is to assess the overall financial position rather than make a rushed decision.

Homeowners should consider:

1. Reviewing the outstanding mortgage balance and current repayments.
2. Checking their household budget and available savings.
3. Contacting their lender early if repayments become difficult.
4. Seeking qualified advice before refinancing, selling or restructuring debts.
5. Considering transaction costs and potential tax implications before making an investment decision.

If a homeowner is experiencing financial hardship, contacting the lender early may help identify available hardship assistance or other appropriate options.

Importantly, a decline in property value does not automatically mean a homeowner should sell. The right decision depends on affordability, employment stability, future plans and individual circumstances.

Frequently Asked Questions About Australia’s 5% Deposit Scheme

Can first home buyers enter negative equity with a 5% deposit?

Yes. If a property’s value falls below the outstanding mortgage balance, the owner may enter negative equity. A smaller initial deposit means there is less equity available to absorb a price decline.

Does the Australian Government guarantee protect buyers from negative equity?

No. The scheme’s guarantee helps participating lenders provide eligible loans with smaller deposits. It does not protect the buyer from falling property values or remove their responsibility to repay the mortgage.

Is buying a home with a 5% deposit a bad decision?

Not necessarily. It may help eligible buyers enter the market sooner, but they should carefully assess affordability, repayment risks and their ability to manage unexpected expenses.

What happens if I need to sell my home while in negative equity?

The sale proceeds may not cover the outstanding mortgage and selling expenses. You may need to contribute additional funds or discuss options with your lender.

Can an accountant help me prepare financially for buying a property?

An accountant can help assess your broader financial position, organise financial records, review cash flow and explain relevant tax considerations. Mortgage eligibility and lending advice should be obtained from an appropriately qualified lending professional.

Get Financial Clarity With Latitude Accountants

Buying your first home is a significant financial decision, particularly when borrowing with a small deposit in an uncertain property market.

At Latitude Accountants, we help Australian business owners understand their financial position, manage cash flow and make informed decisions about their financial future.

Whether you’re reviewing your business income, preparing financial records or considering the tax implications of property-related decisions, our team can help you understand the numbers and plan with greater confidence.

Book a Free Business Discovery Call for ABN Holders.

Latitude Accountants contact details:

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton | Adelaide
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Disclaimer

This article provides general information only and does not constitute financial, tax, accounting, legal, property or mortgage advice. Scheme eligibility and requirements may change. Property values can rise or fall, and individual financial circumstances vary. Speak with a qualified adviser or participating lender before making property, lending or investment decisions.