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First Home Buyers at Risk of Negative Equity Under New Scheme

In a recent analysis by Eliza Owen, the head of research at Cotality, concerns have been raised about the potential financial consequences for first-home buyers under the Albanese government's new 5% deposit scheme.

This scheme, known as the First Home Guarantee, allows buyers to purchase property with just a 5% deposit, with the government covering a 15% mortgage guarantee.

Owen's insights highlight the financial impact of this initiative, particularly regarding the added cost of interest and the risk of negative equity.

Under this scheme, buyers of median-priced homes, valued at $848,858, could end up paying over $130,000 in additional interest over the life of a 30-year loan, based on a 5.5% per annum average mortgage rate. However, there is a potential upside for early market entrants, as they may benefit from reduced rental expenses. Owen highlights the substantial savings in Sydney, where the 5% deposit requirement could shorten the deposit-saving period by six years and reduce rental costs, currently averaging $801 per week, by about $251,000.

The scheme's expansion is expected to initially drive up demand, leading to a temporary rise in property prices. As Owen explains, this demand-side stimulus, coupled with interest rate decreases and constrained housing supply, could push home values to the scheme's threshold. While early participants may successfully navigate market entry hurdles, future buyers might face a more inflated market, acquiring homes with smaller deposits and enlarged mortgages.

Such dynamics raise the spectre of negative equity, particularly if house prices experience significant downturns. Past experiences in comparable markets, such as New Zealand and Canada, where house prices have fallen by more than 15% from peak levels, suggest that Australian buyers could encounter similar challenges. This scenario would not only affect individual homeowners but also the broader financial system, given the government's 15% mortgage guarantee, which could amass substantial contingent liabilities for Australian taxpayers.

Published:Thursday, 2nd Oct 2025
Source: Paige Estritori

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Certificate of Deposit (CD):
A savings certificate with a fixed maturity date and specified interest rate, typically higher than a standard savings account.

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