Australian homeowners who purchased properties with a minimal five per cent deposit are facing severe warnings about dangerously high debt levels and the risk of default, as the cost-of-living crisis intensifies and interest rates continue to climb.
Sharp Increase in High-Risk Mortgages
Fresh data from the Australian Prudential Regulation Authority (APRA) has exposed a dramatic jump in risky mortgage lending. Loans with loan-to-value ratios of 95 per cent or more surged from $3.3 billion to $5.4 billion during the December quarter. This scheme now represents a record four per cent of all new owner-occupier loans.
Government Policy Changes and Market Impact
The significant increase coincided with the Albanese Government's October overhaul, which expanded the scheme to nearly all first-home buyers, regardless of their savings or income levels. Originally introduced by the former Coalition government, the policy was initially limited and targeted low-income individuals and couples.
AMP chief economist Shane Oliver told Daily Mail that the scheme is encouraging inexperienced buyers to assume debt they may struggle to manage. 'These buyers are getting in with much higher debt levels, and that risks more first-home owners running into trouble down the line,' he cautioned.
Rising Competition and Affordability Concerns
Oliver argues that while the policy may help young people secure homes sooner, it is also increasing competition at the entry-level end of the property market, where affordability is already under significant strain. The consequence, he explains, is rising prices that exacerbate the very issue the government claims to be addressing.
Although banks are insulated by a government guarantee covering the first 15 per cent of any losses from these loans, households remain fully exposed. 'The banks are fine. The main risk falls on individuals,' Oliver warned.
Inflation and Interest Rate Pressures
Oliver also expressed concern about inflation, driven by surging oil prices and ongoing conflict in the Middle East. All four major Australian banks now anticipate the Reserve Bank will increase the cash rate by 25 basis points on Tuesday, with another rise likely in May. The current cash rate stands at 3.85 per cent.
'Higher petrol prices feed inflation, and that pressures the economy. If people lose jobs or incomes fall, even a small rate rise becomes tough to absorb,' Oliver stated. 'So the vulnerability is greater for first-home buyers entering with minimal equity.'
Stagflation Risks and Economic Vulnerability
He warned that continued rises in oil prices could create a stagflation squeeze, further endangering borrowers. 'We're piling more risk onto first-home buyers,' he said. 'This scheme is a Band-Aid. The real solution is more housing supply.'
Criticism from Economists and Market Analysts
Economist Leith van Onselen, a long-time critic of the five per cent deposit scheme, condemned its impact, arguing it institutionalises high-LVR lending and exposes recent buyers to market corrections. In February, van Onselen asserted that buyers had been 'suckered into a bubble market' and risk negative equity even with modest price declines.
'By encouraging first-home buyers to enter the market with tiny deposits in a rising interest-rate environment, the Albanese Government has set many up to fail,' van Onselen told Daily Mail.
Alarming Debt Figures and Repayment Projections
Australian Bureau of Statistics figures reveal the average first-home buyer mortgage reached $607,500 in the December quarter, with buyers using the scheme typically borrowing even more. Under current forecasts, three 0.25 per cent rate hikes in 2026 would add $291 per month to repayments on the average first-home buyer loan. A fourth hike would push the cumulative increase to $391 monthly.
Van Onselen highlighted that recent buyers in Sydney and Melbourne should be particularly concerned, with prices now stalled and SQM Research's Louis Christopher forecasting falls in 2026. This poses a dangerous prospect for those who purchased properties with wafer-thin equity.
Government Protection and Borrower Exposure
Oliver emphasised that while banks enjoy government protection, families do not. 'If inflation stays high and growth slows, the pain will fall squarely on overstretched borrowers.'
Discrepancy in Housing Policy Projections
The Albanese government had previously argued that its housing policies would increase prices by only 0.6 per cent 'over the medium term,' though Treasury's full modelling has not yet been released. However, data from Cotality shows that entry-level home prices, specifically those under Labor's price cap, rose by 3.6 per cent in just the first quarter of the scheme's operation.
The Opposition contends this means the government's projected 0.6 per cent increase was surpassed within the first month, well before the end of the quarter or the first year. Daily Mail has contacted Housing Minister Clare O'Neil for comment on these developments.
