How to Protect Yourself When Using the 5% Deposit Scheme
If you've been reading the news or scrolling through social media this week you've probably seen some headlines about first home buyers using the 5% deposit scheme and something called negative equity. And look, I want to address this head on.
Yes, there is a real risk worth understanding. But for every client of ours who uses this scheme there's a clear strategy that goes with it and that's what this resource is about because that's the part the headlines are missing.
In this resource we're covering:
What the headlines are actually saying
What negative equity really is and when it matters
How you protect yourself whether you're still planning to buy or you've already bought using the scheme
The five protection strategies that make a real difference
What to do if you're already in the scheme and feeling anxious
This resource supports Episode 39 of the First Home Unlocked Podcast: Unlocking the 5% Deposit Scheme: The Negative Equity Risk and How to Protect Yourself.
What The Headlines Are Actually Saying
So let's start with what the headlines are actually saying. After the Federal Budget a number of economists put out forecasts suggesting that national property prices could fall.
Westpac economists for example are forecasting a fall of 3% in Sydney and 4% in Melbourne this year with others putting out even bigger numbers, some as high as 5-10%. But it's worth noting that not everyone agrees. CBA for example is still forecasting positive growth of around 3% across 2026 and into 2027. So there's a real range of views out there.
The headlines have connected these price forecasts to the 5% deposit scheme pointing out that a drop greater than 5% puts recent buyers into negative equity territory on paper. Which sounds scary if you don't understand what it actually means.
Understanding Bank Forecasts
When you see bank forecasts like these it's worth remembering that banks make forecasts based on their view of the economy at that moment. But forecasts change as conditions change. The reality is nobody knows for certain what's going to happen.
What matters more than what might happen to prices in the next six months is understanding what you're actually buying and having a plan in place to handle whatever comes in the future.
What Negative Equity Actually Is
Let's talk about what negative equity actually means because understanding this is the key to not panicking when you see the headlines.
Negative equity is when the amount you owe on your mortgage is more than your property is currently worth.
So if you bought a home for $900,000 with a 5% deposit you've borrowed $855,000. If the market value dropped by around 6% to $846,000 you'd technically be in negative equity. You owe more than the home is worth.
When Negative Equity Is Actually a Problem
Now here's the thing that the headlines don't say, being in negative equity on paper isn't automatically a crisis.
Your repayments don't change. The bank doesn't call you up and ask for more money. You can still live in your home exactly as you were. Your life doesn't change because the market value went down temporarily.
The issue does become real though if you're forced to sell while you're in that position. Because if you sell for less than you owe you have to cover the difference out of your own pocket and that's really where the risk sits. When something forces you out.
The Five Protection Strategies
So here's how you protect yourself whether you're still planning to buy or you've already bought using the scheme.
1. Know Your Numbers Before You Borrow
The first thing you need to do is understand exactly what you can afford before you commit to anything.
Work through your own numbers. Understand your income, your expenses and your existing commitments. The bank will stress test you on generic living expenses but that might not reflect what you actually spend to live.
You need to know the number that lets you sleep at night. Not the maximum number the bank will lend you but the number that feels genuinely sustainable for your life.
Run the numbers at different interest rate scenarios. If rates go up can you still afford your repayments? Get clear on what your actual comfort zone is.
2. Build Your Buffer Early
Before you buy you need to have buffers in place. We get our clients to aim for an emergency fund that covers three to six months of living expenses. That's your safety net if something unexpected happens.
This buffer is crucial because life is unpredictable. Your car breaks down, you need a dental emergency, your income gets interrupted for a few weeks. These things happen and when they do you need to be able to cover them.
When you're buying with a 5% deposit and borrowing at 95% you've got less financial flexibility than someone with a bigger deposit. So that emergency fund becomes even more important. It's the difference between being able to handle an emergency cost and being forced to make a difficult decision about your home.
Start building this buffer while you're still saving for your deposit. If you can get to a point where you've got three to six months of essential living expenses sitting in a separate account before settlement that takes a lot of stress out of the equation.
3. Get Clear on Your Goals and Buy for the Long Term
One of the first things I do with every client is ask about their goals and vision. Not just what they want to buy but why. What does life look like in five to ten years and does this property actually fit that.
Property is expensive to buy and sell. You've got stamp duty, legal costs, agent fees. If you're turning around and selling in one or two years those transaction costs alone can set you back significantly.
You also need to give the asset time to actually grow for you. Like any asset class you want to be going in with a long-term mindset.
The reality is you only lose money if you sell during a downturn. If you can meet your repayments and you're not being forced into a sale you can keep going.
When you're buying your first home especially if you're planning to use the 5% deposit scheme you really want to be buying with the mindset of holding the property for at least the next 5-10 years. That timeframe protects you from short-term market movements.
4. Do the Work on Asset Quality
Not every property carries the same risk. A property with strong owner-occupier demand, good fundamentals and a genuine broad buyer pool isn't going to behave the same way in a downturn that a high-rise apartment in an oversupplied area does.
We've seen this play out in the data many times. During downturns some suburbs barely move while others take real hits. The difference usually comes down to asset quality.
A property with strong lifestyle appeal, good infrastructure, proximity to employment hubs, schools and amenities is still going to be in demand from owner-occupiers. Those properties hold value better through market cycles.
The properties most at risk are the ones that were primarily attractive to investors for tax reasons rather than being genuinely desirable places to live and this is exactly why we've always said asset quality matters so much.
We did a deep dive on asset quality back in Episode 6 and we've got a free Asset Quality Checklist that helps you pressure-test a property before you buy. That work on the front end makes a real difference.
5. Get Your Insurance and Income Protection Sorted
This one doesn't get talked about enough. Getting your insurance and income protection sorted is one of the most powerful protection strategies you have.
Because again the biggest risk to your ability to hold a property isn't a price drop. It's losing your ability to earn an income. If you're injured or seriously sick and you can't work your mortgage repayments don't stop.
Income protection only covers you if you can't work due to illness or injury. It doesn't cover job loss. So that's a separate risk to think about and factor into your emergency fund and buffers.
But having the right insurances in place means if something unexpected happens you've got options and breathing room.
If You've Already Bought
Let's talk to the people who are already in the scheme and feeling anxious right now after seeing everything in the news this week. I get it. It can feel overwhelming.
But here's what matters, if you bought a quality asset that you're planning to stay in for the next 5-10 years, if you stress-tested your numbers before you committed and if you have your emergency fund in place, you've already done the work that matters most.
If prices do drop in the short term remember you only lose money if you sell during the downturn. If you can meet your repayments and you're not being forced into a sale you can keep doing what you're doing.
Keep building your equity through your repayments. Keep your buffers in your offset account topped up. Stay focused on the long term.
If You're Feeling Stretched
If you're feeling stretched with your repayments right now the most important thing is to pick up the phone early. Don't wait until it becomes a crisis.
Talk to your broker. There are options available well before things get to a point of forced sale and the earlier you have that conversation the more options you have.
You can restructure your loan. You can look at different repayment options. There are a lot of levers you can pull before you're ever in a position where you have to sell.
Final Thoughts
Look, there's a lot going on right now and if you're feeling uncertain after everything we've talked about here that's completely understandable.
But here's what we want you to take away from this, no matter where you are in your journey the answer is always the same. Come back to your goals, get the right people around you and make decisions based on your situation.
Negative equity is a real risk worth understanding. It's not a reason to panic and it's not a reason to avoid the 5% deposit scheme. But you do need to go in with the right strategy.
Know your numbers before you borrow. Build your buffer early. Buy a quality asset. Protect your income. And buy for the long term not just the market you're in today.
If you want to talk through what any of this looks like for your specific situation you can Book a Get to Know You Chat. We'll help you work out where you actually stand and map out what your next step looks like.
