The Guarantee Covers the Bank
More than 100,000 first home buyers used the 5% deposit scheme in its first expanded year. The guarantee behind them covers the lender, the falling price lands on the buyer, and the whole thing is announced as help.
More than 100,000 first home buyers used the 5% deposit scheme in its first expanded year. The guarantee behind them covers the lender, the falling price lands on the buyer, and the whole thing is announced as help.
Page four of the government's information guide for the 5% Deposit Scheme has a sentence that never makes it into the press conference. "A Guarantee protects the Participating Lender, not you."
That is Housing Australia, the agency that runs the scheme, explaining its own product in the July 2026 edition. It is not a gotcha. It is the design. And it is the line that drops out every time the scheme is announced as help.
On 1 October 2025 the scheme opened to every first home buyer. No cap on places, no income limits, and higher price caps: $1.5 million in Sydney and the New South Wales regional centres, $950,000 in Melbourne, $1 million in Brisbane and Canberra. Put 5 per cent down and skip lenders mortgage insurance.
The Prime Minister's release that day did the maths. A Sydney buyer "can purchase a $1 million home with a $50,000 deposit" and "save about $42,000 in mortgage insurance." The Housing Minister, Clare O'Neil, said buyers could "stop paying off someone else's mortgage and start building equity in their own home."
Hold on to that last phrase. Equity was the promise.
A year later, on 1 October 2026, the Prime Minister and Ms O'Neil said 102,594 first home buyers had used the expanded scheme, 99 per cent of borrowers were ahead of or on track with repayments, and only 13 claims had been paid since the scheme began. Those numbers are real. I will come back to the 13.
Normally, if you borrow more than 80 per cent of a home's value, the lender makes you pay for lenders mortgage insurance. ASIC's Moneysmart site is blunt about who that is for: "LMI does not benefit the borrower, it only protects the lender."
The scheme swaps the insurance for a government guarantee. Same job, different payer. Housing Australia issues the guarantee to the lender, worth up to 15 per cent of the property value, fixed when you buy. The lender can claim it only if you default, the home is sold, the sale money goes to the loan, and something is still owed.
The guide then lists what the guarantee does not do. It does not help with missed payments. It does not stop you defaulting. It does not stop the lender repossessing and selling your home. And it does not cover what you still owe after the guarantee has been paid out.
So the buyer stops paying a premium for insurance that never protected them. That is a genuine saving, and the scheme deserves credit for it. But the protection did not move to the buyer. It moved from a private insurer to the taxpayer, and it still points at the bank.
The Reserve Bank says as much, in its own language. Its October Financial Stability Review says scheme borrowers are unlikely to spread stress through the financial system partly because "the Government guarantees up to 15 per cent of the property value in the case of default." The system is protected. That is the regulator's job, and it is good news for the system. It is not the same thing as the buyer being protected.
Five per cent is not much skin. Take a composite buyer, not a real person: an $800,000 home, $40,000 down, $760,000 borrowed. If the value slips 5 per cent, the deposit is gone on paper. If it slips 6 per cent, the buyer owes more than the place is worth. Early repayments do not move that much, because in the first years most of each payment goes to interest.
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Prices have been slipping. The realestate.com.au Home Price Report for September has national prices 3.3 per cent below their March peak, Sydney 5.5 per cent below its peak and Melbourne 5.7 per cent below. For most owners those are dents. For a 5 per cent buyer who bought near the top, they are the whole deposit.
Luc Redman, an economist at realestate.com.au, has been running the scheme's buyers against the PropTrack price index. In August his estimate was about 87 households in negative equity. In mid-September it was 480, about 1 per cent of scheme participants, assuming a 5 per cent deposit and nothing in an offset account. The deepest holes were in Melbourne and Sydney, among buyers who paid close to the price cap, and prices kept falling through September.
The Reserve Bank estimates fewer than 1 per cent of all borrowers owe more than their home is worth, and says recent buyers and high loan-to-value borrowers "are more likely to be in negative equity". It names scheme buyers in that group.
Here is the fair part, and it matters.
Negative equity is not a missed payment. If you keep your job and keep paying, an underwater home is a number on a valuation, not an eviction. The Reserve Bank says negative equity "is insufficient to trigger default if borrowers remain able to service their loans," and that this remains the case for the vast majority. Redman made the same point in August: banks do not tend to force a sale over negative equity while the repayments are being met. Every one of these buyers was also tested at 3 percentage points above their loan rate, under the regulator's serviceability buffer. The 13 claims tell you most scheme buyers have not been pushed to the wall.
So nobody should read 480 as 480 foreclosures. It is not that.
But the Reserve Bank is honest about the next step. In the same review it notes that low or negative equity raises a borrower's likelihood "of both falling into arrears and transitioning from arrears into foreclosure." Equity is the exit. It is what lets a household that hits trouble sell, clear the loan and walk away. A thin wedge is a thin exit.
This is the part I care about most, because it is the part that never makes the release.
The old line is that it takes money to make money. For a long time the first home was where that money came from. You bought, you paid it down, prices did their thing, and the equity became the deposit on the next place, the renovation, or the business. That last one is not nostalgia. The Reserve Bank notes in the same review that many smaller businesses borrow against the owner's home.
Now read the scheme's rules with that in mind.
While the guarantee is on the loan, you cannot top it up. The guide's own example is a buyer who wants to borrow more for a renovation a year in, and the answer is no: "increasing the loan amount after settlement isn't permitted under the Scheme." Borrow more against the property and the guarantee ends, and if your loan is still above 80 per cent of the value, the lender may charge mortgage insurance after all.
Refinancing is fenced too. You can move to another lender on the scheme's panel and keep the guarantee, but you cannot increase the loan or extend the term. Move to a lender off the panel and the loan loses the scheme's benefit. The guarantee comes off by itself when scheduled repayments bring the balance down to 80 per cent of the value the home had when you bought it.
The government says the average borrower is off the scheme in about two and a half years. In a rising market that is exactly how it should work. The price climbs, the balance falls, the guarantee drops away, and the first home becomes a rung.
In a falling market the same rules hold the buyer in place. No top-up. Refinancing only like for like, inside the panel. And the moment they step outside it, the guarantee is gone and the bill for the missing insurance can arrive. The home still has a roof. It just stops being a ladder. It takes money to make money, and the money is the equity that a 6 per cent fall has wiped out.
Line it up.
The buyer carries the first loss. The deposit goes before anyone else loses a cent, and the guide says that if a sale does not cover the loan, "you may still need to repay the outstanding amount not covered by the Guarantee."
The lender is covered for the next slice, up to 15 per cent of the value, by the Commonwealth. The bank still holds capital against the loan, and the prudential regulator says higher loan-to-value loans attract higher capital requirements. That is sensible. It is also a reminder of who the risk framework is built around.
The taxpayer carries the tail, and so far the tail is small. Thirteen claims is a good number. I hope it stays that way.
None of this needs a villain. A scheme designed to get people in the door was measured on how many got in the door. The 2025 change to Housing Australia's rules added reporting on the number of guarantees issued every six months. That counts doors opened. Nothing in that addition asks how much equity the people behind those doors still have. When realestate.com.au wanted the purchase data to estimate it, Redman wrote that it came through a freedom of information request.
I am not arguing the scheme should be scrapped. For a buyer with a secure job, a long horizon and a price they can carry, getting in years earlier and skipping a premium that protected only the bank can be a good deal. Plenty of people will ride this out, and the Reserve Bank thinks most will.
I am arguing about the announcement. If the guide can say "A Guarantee protects the Participating Lender, not you," the press release can say it too. And if the government can tell us 102,594 people got in, Housing Australia can tell us, every six months, how many of them are now underwater, by city and by price band, without a journalist or an economist having to file for it.
Help is a deposit you do not have to save. Protection is something that pays out when things go wrong for you. The scheme delivers the first and calls it the second.
The guarantee covers the bank. The buyer is covering everything else.
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