In the wake of Australia's expanded first-home buyer deposit scheme, a generation of new homeowners finds itself caught between the promise of entry and the peril of exposure — owing more to their lenders than their homes are now worth. Property values across Sydney and Melbourne have fallen sharply since October 2025, erasing the thin 5 per cent deposits that were, for many, the sum total of their financial foothold. The collision of rising interest rates, mid-course budget reforms, and a market that turned before buyers could find their footing has transformed a policy of inclusion into a so
First-home buyers face negative equity trap as property values plummet
First-home buyers who accessed the scheme face potential financial hardship, job loss vulnerability, and risk of losing their homes if unable to meet mortgage obligations in negative equity positions.
The deposit that got them in has simply vanished.
Mark
So what's actually happening here? Are these people going to lose their homes?
Mimi
Not necessarily, but they're in a precarious position. If they stay in the home and keep paying the mortgage, they'll eventually build equity again as prices recover. The real danger is if they need to sell or lose their job—then they're selling a home worth less than they owe.
Luke
But we should be clear: the data shows price falls, not defaults. The government says only 15 claims have been paid out of 200,000 guarantees since the scheme started. So far, the actual damage is mostly on paper.
Mark
Why did prices fall so sharply after the scheme expanded?
Mimi
The expansion in October boosted demand and pushed prices up. Then in May, the government announced budget reforms—changes to negative gearing and other tax rules. Interest rates also climbed. Buyers lost confidence and demand dropped. Those who'd already committed to purchases before May got caught holding the bag.
Luke
That's the political criticism, right? That Labor expanded the scheme without warning buyers about the tax changes coming in the budget. But we should note that's Andrew Bragg's interpretation. The government would say the scheme itself is working—very few defaults, 280,000 people in homes who wouldn't be otherwise.
Mark
Who's most at risk right now?
Mimi
Vulnerable buyers—people who've lost jobs, who are already stretched thin on their budgets. With interest rates likely to rise again, their repayments will jump. If you bought with 5 per cent down, you're carrying more debt than someone with a 20 per cent deposit, and you're already paying higher interest rates.
Luke
The data does show that 59 per cent of scheme users since 2020 actually used deposits larger than 5 per cent. So not everyone is at the razor's edge. But yes, those who used exactly 5 per cent and bought before May are in the tightest spot.
Mark
What can they actually do?
Mimi
Cut expenses, shop around for better rates, refinance if possible. If things get really bad, they can ask the bank for hardship support, though that hurts your credit score. The mortgage broker I read said the key is whether you can afford to stay in the home for five years or more while prices recover.
Luke
And that's the honest answer—there's no magic fix. It depends on the individual's job security, their other debts, their confidence in the market. For someone like Jade McCudden, who's buying in an area she loves and plans to stay long-term, the scheme worked. For someone who loses their job in the next year, it could be devastating.
The Pulse
- Nearly 42 per cent of Sydney properties purchased under the scheme have shed more than 5 per cent of their value, effectively wiping out buyers' deposits and leaving them in negative equity — owing more than their homes are worth.
- The May 2026 budget reforms, including changes to negative gearing, combined with successive interest rate rises to drain demand from the market at precisely the moment when scheme buyers were most exposed.
- In some Sydney suburbs, average losses have reached $233,000 per property — a 22.5 per cent decline — while cheaper outer-ring areas long favoured by first-home buyers have also recorded falls well above the 5 per cent threshold.
- With markets pricing in further rate hikes and repayments set to climb, borrowers in negative equity face a narrowing set of options: cut spending, avoid selling, refinance if possible, or seek hardship support at the cost of their credit rating.
- The government defends the scheme's record — fewer than 15 defaults across more than 200,000 guarantees — while the political opposition argues buyers were pushed into 95 per cent mortgages without disclosure of the tax reforms that would follow.
In the wake of Australia's expanded first-home buyer deposit scheme, a generation of new homeowners finds itself caught between the promise of entry and the peril of exposure — owing more to their lenders than their homes are now worth. Property values across Sydney and Melbourne have fallen sharply since October 2025, erasing the thin 5 per cent deposits that were, for many, the sum total of their financial foothold. The collision of rising interest rates, mid-course budget reforms, and a market that turned before buyers could find their footing has transformed a policy of inclusion into a source of acute vulnerability. What began as a bridge into the market has, for thousands, become a ledge.
Thousands of Australians who entered the property market through the government's 5 per cent deposit scheme are now confronting a financial reality that few anticipated when they signed their contracts. New analysis by SuburbData shows that in Sydney, close to 42 per cent of properties purchased under the scheme since its October 2025 expansion have lost more than 5 per cent of their value — enough to erase the entire deposit and leave buyers in negative equity. Melbourne's figures are worse still, with nearly half of eligible properties recording similar losses. In some Sydney suburbs, average losses have reached $122,000 to $233,000 per home.
The sequence that produced this crisis is now well understood. The scheme's expansion initially stoked demand and pushed prices upward. Then came the May 2026 budget, which introduced changes to negative gearing rules. Interest rates rose. Demand fell sharply. Buyers who had committed before May found themselves holding mortgages on homes worth less than they owed — at the worst possible moment, with further rate rises still expected.
The scheme itself carries an impressive headline record: 280,000 first-home buyers assisted since 2020, $2.3 billion saved in mortgage insurance, and fewer than 15 guarantee claims ever paid. The government maintains it has been a success, and that without it, many buyers would never have entered the market at all. But critics argue that the October expansion was reckless, and that buyers were not told about the tax reforms that would follow.
For those now in negative equity, the advice from brokers and analysts is consistent if sobering: do not sell, reduce expenses wherever possible, explore refinancing if the loan-to-value ratio still permits it, and approach lenders for hardship support only as a last resort. Some buyers, like Marrickville purchaser Jade McCudden, remain confident that time in the market will vindicate their decision. Others, particularly those who bought at the peak just before May, are less certain. As broker Dean Inzitari observed, the scheme can work — but timing and long-term confidence in affordability are everything. For thousands of Australians right now, both are in short supply.
Thousands of Australians who bought homes using the government's 5 per cent deposit scheme are now trapped in a financial squeeze that could cost them everything. New data reveals that in Sydney, nearly 42 per cent of properties purchased under the scheme since its expansion in October 2025 have lost more than 5 per cent of their value—wiping out the thin deposit these buyers put down and leaving them owing the bank more than their homes are worth. In Melbourne, the situation is even worse, with close to half of scheme-eligible properties recording similar losses. Brisbane saw roughly a quarter of properties decline. For buyers who scraped together just 5 per cent to get through the door, these price falls are catastrophic. The deposit that got them into the market has simply vanished.
The timing could hardly be worse. Property research group SuburbData examined all sales below the scheme's price caps across major cities from October 2025 through August 2026 and found average losses of around $83,000 per property in Sydney. In some inner-west suburbs like Strathfield-Burwood-Ashfield, 676 homes traded within the cap and lost an average of $122,000 each—a 15 per cent decline. North Sydney and Mosman fared even more severely, with average losses near $233,000, or 22.5 per cent. Cheaper areas that have long attracted first-home buyers—Mount Druitt, St Marys, Fairfield, Penrith—all recorded falls well above 5 per cent.
What triggered the collapse is a sequence of policy decisions and market forces that caught buyers between them. The scheme's expansion in October 2025 boosted demand in the early months, pushing prices up. Then in May 2026, the government announced budget reforms including changes to negative gearing rules. Interest rates climbed. Demand fell off sharply. Those who had already committed to purchases before May found themselves holding mortgages on homes worth less than they owed. SuburbData analyst Jeremy Sheppard put it plainly: "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." His concern is for the vulnerable—people who have lost jobs, who have limited options.
The scheme itself has been a political centerpiece. Since its 2020 inception, it has helped 280,000 first-home buyers access the market, saving them $2.3 billion in lender's mortgage insurance costs. The government points out that since the scheme began, only 15 claims have been paid out of more than 200,000 guarantees—less than 0.01 per cent. No guarantees have been paid since the October expansion. The government spokesman noted that without the scheme, many first-home buyers would not have entered the market at all. But the political opposition has seized on the expansion as reckless. Shadow Housing Minister Andrew Bragg said Labor was warned about price hikes and negative equity but "charged ahead anyway," and that buyers were sold 95 per cent mortgages without disclosure of coming tax reforms that would crater the market.
Canstar data insights director Sally Tindall framed the core problem: "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." Since the scheme was uncapped in October, $15 billion in owner-occupier mortgages have been written with 5 per cent deposits. Many of those borrowers, particularly in Sydney and Melbourne, are now in negative equity. They hold more debt than their peers with larger deposits and are charged higher lending rates. With markets pricing in an 86 per cent chance of another interest rate hike and lenders warning of two more after that, their repayments are about to climb further.
For those already struggling, options exist but are limited. Mortgage brokers advise first reducing expenses—reviewing energy providers, insurance, shopping around for better rates. Lenders are becoming more competitive as their loan volumes drop, so refinancing to another 5 per cent deposit lender is possible if the loan-to-value ratio hasn't exceeded 95 per cent. As a last resort, borrowers can approach their bank for hardship support, though this damages credit scores. One recent buyer, Jade McCudden, who accessed the scheme for a Marrickville home settling later this year, said she wouldn't have been able to buy without it and remains confident prices will recover over the years she plans to stay. But her confidence is not universal. Mortgage broker Dean Inzitari, with nearly two decades of experience, noted that those who bought before May had the rug pulled from under them—they bought when the market was peaking, only to face the May reforms. The scheme can work for the right buyer in the right circumstances, he said, but timing and confidence in long-term affordability matter enormously. For thousands now in negative equity, neither is on their side.
Notable Quotes
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.— Jeremy Sheppard, SuburbData analyst
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.— Sally Tindall, Canstar data insights director
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