For many Australians, saving a traditional 20% deposit has become one of the greatest barriers to home ownership.
The Australian Government’s 5% Deposit Scheme can provide eligible first-home buyers with an opportunity to purchase sooner and avoid Lenders Mortgage Insurance. The expanded scheme has no income caps, unlimited places and can be used to purchase an eligible house, townhouse or apartment, subject to the scheme requirements and applicable property price caps.
For the right buyer, this can be life-changing.
It may provide an opportunity to leave the rental market, establish a permanent home and begin building equity sooner than might otherwise have been possible.
However, the scheme is not necessarily right for everyone, and it should never be entered into without carefully considering the risks of purchasing with very little equity.
There is also an important distinction that can become lost in the excitement of buying a first home:
Helping someone enter the property market is not the same as helping them choose the right property.
A finance approval confirms that a lender is prepared to provide funds, subject to its conditions. It does not confirm that the purchaser is paying fair market value, that the property is free from significant risks or that it will remain suitable for the buyer’s needs.
Put simply, a buyer can be approved to borrow and still buy the wrong property.
The scheme is an opportunity, but it is not right for everyone
This is not an argument against the 5% Deposit Scheme.
Every buyer’s financial circumstances are different. The decision to proceed with a particular deposit, loan amount or lending structure belongs to the buyer, supported by appropriately qualified finance, accounting and legal professionals.
Many first-home buyers using the scheme are financially responsible, well-informed and entirely capable of meeting their commitments. A smaller deposit does not automatically make someone an unsuitable buyer, nor does it make the property they purchase a poor decision.
For buyers with secure income, strong cash flow, an appropriate financial buffer and a long-term plan to retain the property, the scheme may offer a valuable pathway into home ownership.
However, purchasing with a 5% deposit generally means borrowing approximately 95% of the property’s value. That leaves very little initial equity and, consequently, very little protection if the property falls in value.
That risk must be understood, not to frighten buyers away from the scheme, but to ensure they make the decision with their eyes open.
What happens if property prices fall by 5%?
Consider a first-home buyer purchasing a property for $700,000 with a 5% deposit.
Their deposit is $35,000 and their loan may be approximately $665,000, before accounting for subsequent principal repayments and other costs.
If the market value of that property then falls by 5%, it may be worth approximately $665,000, the same amount as the original loan.
In simple terms, the buyer’s initial equity may have been completely erased.
This does not mean they must immediately sell or that the loss has been permanently realised. Property should generally be approached as a longer-term purchase, and values naturally rise and fall through different market cycles.
However, circumstances can change.
A relationship can end. Employment can be lost. A family may need to relocate. Illness may affect a household’s income. The property may no longer meet the buyer’s needs.
If the owner is forced to sell while the property’s value is equal to, or less than, the outstanding loan, selling costs could place them in an even more difficult financial position. They may not receive enough from the sale to repay the loan and cover the associated expenses.
The smaller the buyer’s starting equity, the smaller their margin for error.
First-home buyers are making enormous financial decisions
In the June quarter of 2026, Australian first-home buyers entered into 29,319 new owner-occupier loan commitments, with a combined value of approximately $18.4 billion.
Although the number of first-home buyer commitments fell by 2.9% from the previous quarter, their total value increased by 0.2% and was 10% higher than one year earlier.
That represents tens of thousands of Australians making one of the largest financial decisions of their lives in a single quarter.
APRA’s latest figures also show that loans with a loan-to-value ratio of at least 80% represented 29.7% of all new housing loans funded by authorised deposit-taking institutions during the June 2026 quarter. APRA also reported that 5.6% of new lending involved debt of at least six times the borrower’s income.
These figures relate to the broader mortgage market and are not limited to first-home buyers or government-supported loans.
Higher leverage is not inherently wrong. However, it means the financial consequences of overpaying or purchasing a compromised property can be more difficult to absorb.
A smaller deposit makes the property decision even more important
A buyer contributing a larger deposit begins with a greater equity buffer.
A buyer contributing 5% does not have the same protection.
That makes it especially important to consider:
- whether the buyer has a sufficient financial buffer after settlement;
- their ability to manage repayments if interest rates or circumstances change;
- how long they expect to retain the property;
- the quality and underlying value of the asset;
- the risk of overpaying;
- the amount of competing housing supply in the area;
- the property’s future resale appeal; and
- whether waiting and accumulating a larger deposit may provide greater protection.
A low-deposit purchase can work very well when the purchaser has stable finances, buys a sound property at a well-supported price and is prepared to hold it for the longer term.
But when the initial margin for error is only 5%, property selection and price discipline become critical.
The scheme may help someone purchase sooner, but purchasing sooner is not always the same as purchasing safely.
A bank valuation is not a property recommendation
One of the most dangerous misunderstandings in property is the belief that finance approval or a lender’s valuation confirms that a property is a good purchase.
It does not.
The lender is assessing whether the property represents acceptable security for the proposed loan. Its valuation is undertaken for lending purposes.
It is not a comprehensive assessment of:
- whether the buyer is overpaying;
- whether better properties may be available within the same budget;
- the property’s future marketability;
- surrounding development or oversupply;
- building defects or upcoming repairs;
- owners corporation liabilities;
- planning restrictions or adverse surrounding uses;
- the functionality of the floor plan;
- the underlying performance of the location; or
- whether the property supports the buyer’s long-term goals.
A property may satisfy a lender’s requirements and still be the wrong property for the purchaser.
First-home buyers are expected to recognise risks they have never encountered
Experienced property professionals can identify issues that may be almost invisible to someone buying for the first time.
A first-home buyer may not immediately understand why two apparently similar properties have very different values. They may not recognise the effect of poor natural light, an impractical floor plan, a compromised position, excessive owners corporation fees, nearby development or an oversupply of similar properties.
They may not know which defects are relatively straightforward, and which could become extremely expensive.
They may also be negotiating with a selling agent who is engaged to achieve the best possible result for the vendor.
That is not a criticism of selling agents. It is simply the nature of the transaction. The selling agent represents the seller, not the purchaser.
Yet buyers are often expected to inspect a property for 20 minutes, understand a lengthy contract, interpret comparable sales, assess future resale appeal and negotiate against an experienced agent, all while making an intensely emotional decision.
The greatest danger may not be borrowing too much
It may be buying too poorly.
A modest home purchased at a well-supported price, in a location with strong underlying demand and without unacceptable risks, may place a first-home buyer in a substantially stronger position than a visually impressive property carrying serious compromises.
New finishes can be seductive. So can expressions such as “off-market”, “rare opportunity” and “priced to sell”.
But fresh paint cannot overcome a poor location. Styling cannot correct an impractical floor plan. An off-market property is not automatically good value. A government-supported deposit does not protect a purchaser from overpaying.
Access to finance creates an opportunity to buy.
It does not remove the need to investigate.
Who is actually checking the property?
A strong purchasing team may include a mortgage broker or lender, conveyancer or solicitor, building and pest inspector, accountant where appropriate, and an experienced buyer’s representative.
Each performs a different role.
The finance professional assesses borrowing options and lending structure. The legal representative reviews the contract and title documentation. The building inspector examines the physical condition of the property within the scope of the inspection.
A buyer’s agent or advocate researches the property and comparable sales, investigates the location and market, identifies potential risks, coordinates appropriate due diligence and develops a negotiation strategy.
No single professional should be expected to perform every role.
The strongest protection comes when buyers surround themselves with appropriately qualified professionals who work together, while the purchaser remains firmly in control of the final decision.
The right question is not simply, “Can I buy?”
It is understandable that first-home buyers concentrate on obtaining finance approval. For many, reaching that point has taken years of saving and sacrifice.
However, approval should begin the next stage of questioning:
- Is this property fairly priced?
- What evidence supports its value?
- What are its weaknesses as well as its strengths?
- What could make it difficult to sell in the future?
- What investigations should be completed before I commit?
- Can I comfortably hold it if my circumstances or the market change?
- Does it meet my needs beyond the next twelve months?
- Am I purchasing it because it is right, or because I am frightened of missing out?
These questions do not diminish the excitement of buying a first home.
They help protect it.
A pathway into the market should also be a pathway to security
The 5% Deposit Scheme can provide an extraordinary opportunity for Australians who might otherwise spend years trying to catch a constantly moving savings target.
However, it is not right for everyone.
Buyers should carefully consider the risks of beginning with limited equity and obtain appropriate financial and legal guidance before deciding whether the scheme suits their circumstances.
A government guarantee may assist the lender, but it does not guarantee the purchaser against overpayment, falling property values or buying the wrong property.
Success cannot be measured only by how many buyers enter the market.
The real measure is whether those purchasers secure homes they can comfortably hold, enjoy and eventually sell without discovering that the risks were present from the beginning.
Getting approved is an important milestone.
But the property selected, the price paid and the buyer’s ability to hold it through changing conditions will ultimately determine whether purchasing sooner was the right decision.
This article contains general information only and does not constitute financial, credit, legal, taxation or investment advice. Buyers should obtain guidance from appropriately qualified professionals regarding their individual circumstances. Eligibility for government schemes and finance approval remains subject to the applicable requirements and lender assessment.
Sources
- Australian Government First Home Buyers website, Australian Government 5% Deposit Scheme.
- Australian Bureau of Statistics, Lending Indicators, June Quarter 2026, released 14 August 2026.
- Australian Prudential Regulation Authority, Quarterly Authorised Deposit-taking Institution Property Exposure Statistics – June 2026, published 17 September 2026.
About the Author
Shannon Koetsveld is the founder of The Property Effect and a Melbourne-based buyer’s agent who helps home buyers and investors purchase property with strategy, due diligence and confidence. She brings more than 25 years of hands-on real estate and property law experience to help clients identify risk, assess value and secure properties aligned with their needs and long-term goals.
To contact Shannon Koetsveld, click here.