Low-deposit first home buyers got into the market faster. Now some are finding out the hard part starts after settlement.
Recent arrears data points to a simple but uncomfortable tension: the 5 per cent deposit scheme can reduce the time it takes to buy, but it does not reduce the size of the debt, the monthly repayment, or the risk of buying with a thin buffer.
The Australian Financial Review reported Equifax data showing 0.78 per cent of new home loan holders were at least 30 days behind on repayments in February, compared with 0.39 per cent for earlier buyers. That is still a low arrears rate in absolute terms, but the gap matters because it shows stress is building first among borrowers with the least room to move.
The timing is awkward. Interest rates may still move higher. Petrol prices have jumped. Food, insurance and council rates are still eating into household budgets. For a first home buyer who stretched to get in with a small deposit, that combination can turn a manageable loan into a monthly pressure test.
The shortcut solved one problem, not the whole problem
The federal government’s 5 per cent deposit scheme is designed to help eligible buyers purchase sooner without waiting years to save a 20 per cent deposit. Housing Australia says the scheme lets eligible first home buyers buy with as little as 5 per cent deposit, while single parents or legal guardians may be able to buy with as little as 2 per cent, without paying lenders mortgage insurance.
That is a real benefit. In a market where prices can move faster than savings, a lower deposit can stop buyers being left behind.
But here’s the catch.
A smaller deposit usually means a bigger loan. A bigger loan means repayments are more exposed to rate moves, income shocks and everyday cost increases. The scheme changes the entry point. It does not make the mortgage smaller.
That is why the arrears signal deserves attention.
A buyer with a 20 per cent deposit has more equity and often more savings discipline behind them. A buyer with a 5 per cent deposit may still be perfectly responsible, but they often start with less equity, less surplus cash and less margin for error.
Why arrears can rise even when unemployment is low
Mortgage stress does not always start with job losses.
Sometimes it starts with ordinary bills.
A couple buys a modest home. The loan is approved. The repayments work on paper. Then petrol rises, insurance renews higher, strata fees increase, or one person’s hours are cut. Nothing dramatic happens, but the buffer disappears.
That is where low-deposit borrowers are more exposed. They do not need a housing crash to feel pain. They just need a few costs to rise at the same time.
For investors and upgraders, this matters because first home buyers often sit at the base of the market. If that segment gets squeezed, it can change demand for entry-level houses, outer-suburban homes and lower-priced apartments.
Australian Property Review recently covered this pressure in The 5% deposit trap pushing first-home prices even higher, where the policy risk was not only borrower stress, but price pressure around scheme caps.
Quick take
The 5 per cent deposit scheme helps buyers clear the deposit hurdle, but it can leave them more exposed after settlement.
The risk is not that every low-deposit borrower defaults. The risk is that a thinner group of borrowers is now carrying larger loans into a higher-cost environment.
That means the next few months are less about the headline promise of “buy sooner” and more about whether buyers can keep enough cashflow spare once the mortgage starts.
The repayment buffer is the real test
Serviceability is the bank’s test of whether a borrower can afford the loan. It usually includes a buffer above the actual interest rate.
But bank approval is not the same as household comfort.
A lender may approve the loan because the borrower passes the formal test. That does not mean the borrower will feel relaxed once repayments, petrol, groceries, power bills and insurance all land in the same fortnight.
This is where many first home buyers make the same mistake: they focus on the deposit and settlement costs, then underweight the first 12 months after moving in.
That first year can be expensive. Furniture, repairs, moving costs, higher utility bills and small maintenance jobs all arrive before the household has rebuilt its savings.
If rates rise again, or if inflation keeps household costs sticky, the borrower with the smallest cash buffer feels it first.
For readers wanting the broader rate context, Australian Property Review’s RBA Rate Shock: Why Borrowers Shouldn’t Bet on Cuts Just Yet is the useful companion read.
What changed and what did not
What changed is the level of stress showing up among newer borrowers. The reported arrears gap between new loan holders and earlier buyers is a warning sign.
What did not change is the basic trade-off behind the scheme.
It still helps buyers enter sooner. It still reduces the savings hurdle. It still avoids lenders mortgage insurance for eligible buyers.
But it does not remove repayment risk. It does not protect buyers from higher living costs. It does not guarantee price growth. It also does not fix the supply shortage that sits underneath Australia’s affordability problem.
That is the part policy slogans usually skip.
A deposit scheme can help the buyer win the keys. It cannot guarantee the buyer has enough breathing room six months later.
The second-order effect investors should watch
This is not only a first home buyer story.
If low-deposit buyers pull back, entry-level demand can soften. That may hit suburbs where recent price growth has relied heavily on first home buyer activity, especially markets near scheme price caps.
There are three things to watch.
First, arrears among newer borrowers. If the gap keeps widening, lenders may become more cautious.
Second, listings in first home buyer suburbs. A lift in forced or reluctant selling would change the tone quickly.
Third, investor behaviour. If investors step into the same price bands while first home buyers are stretched, competition may remain firm. If investors also pull back because yields do not stack up, the entry-level market could lose two sources of demand at once.
That does not mean a crash is the base case. It means the low-deposit segment needs closer attention than the headline market average.
What first home buyers should do before signing
The practical move is simple: pressure-test the loan before you buy, not after.
Start with the repayment at today’s rate. Then add at least one more 0.25 percentage point increase. Then add higher insurance, higher petrol and a basic maintenance allowance.
If the numbers only work when everything goes right, the purchase may be too tight.
A useful rule of thumb: after the mortgage and essential bills, you still want enough surplus cash to rebuild an emergency buffer within the first year. If every spare dollar is already spoken for, the risk is not just default. It is being trapped with no flexibility.
For a broader borrowing-power explainer, read Australian Property Review’s Why It Feels Like You Should Afford a Home, But Still Can’t.
Bottom line
The 5 per cent deposit scheme is not the villain. It solves a real problem for buyers locked out by the deposit hurdle.
But the scheme can also bring people into the market with less equity and less cashflow protection. In a stable rate environment, that may be manageable. In a rising-cost environment, it becomes a sharper risk.
The smart move is not to reject the scheme outright. It is to use it with a stronger buffer than the minimum rules require.
