Crowds at a Sydney auction in late 2025: brokers revealed there was a rush of buyers using the scheme when it was expanded in October. Picture: Rohan Kelly
Labor’s flagship first-home buyer support could become a bigger drain on government coffers, with Treasury officials revealing the costs of the 5 per cent deposit scheme may rise following recent interest rate hikes.
This month’s cash rate hike has raised the stakes for the scheme, fuelling concerns that the higher risk of defaults could force the government to set aside more money to cover bad loans.
In a startling admission to a Senate estimates committee, Treasury officials confirmed they may need to allocate more taxpayer money to cover borrowers who default on their loans.
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The scheme has long been criticised for helping buyers to take out larger loans relative to their property value, with buyers able to buy homes with deposits as low as 5 per cent.
Announcements by RBA governor Michele Bullock of higher rates could mean the cost of the first home buyer scheme rises. Picture: Martin Ollman
Under the scheme, the government guarantees the 15 per cent of the deposit the borrower lacks, allowing them to bypass pricey lenders mortgage insurance.
The borrower remains on the hook for the outstanding 95 per cent of the property price – a risk in a rising rate environment.
There is now fear that rising interest rates could drive up the repayments on these larger mortgages to crippling levels for some families.
Treasury had previously set aside $35.7m in contingent liabilities for defaults in December’s mini-budget.
Officials are now reviewing that sum following the Reserve Bank of Australia’s decision to lift the cash rate to 3.85 per cent, the first hike in two years.
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Minister for Industry and Science Tim Ayres dismissed concerns over the liability of the scheme. Picture: Nikki Short
Treasury first assistant secretary Dr Nerida Hunter confirmed at the Senates estimates meeting on Thursday that the cost of the scheme was under review.
“We have considered the impact of the rate rises on the repayments of participants in the 5 per cent deposit scheme and we will consider the impact on contingent liabilities and publish that outcome in the budget context,” Dr Hunter said.
Cost risks have been compounded by the Labor government’s expansion of the scheme in October.
The move saw previous caps on the number of buyers scrapped and the price thresholds for eligibility significantly raised.
In Sydney, the price cap was increased to $1.5m, up from $900,000. The price caps were lifted to $1m in Brisbane and Canberra and $950,000 in Melbourne.
Adelaide and Perth limits were increased to $900,000 and $850,000, respectively.
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Brokers revealed buyers using the scheme are getting into more debt.
Broker James Algar of Mortgage Choice warned changes to the scheme exposed certain borrowers to higher risk.
“The scheme is probably more popular than the government may have expected,” he said.
“There was a huge rush of buyers using the scheme when they expanded it in October and they often bought with variable rates expecting more interest rate cuts.
“They likely would have borrowed a bit differently if they had expected rates to rise.”
Mr Algar added that those who borrowed more were the worst affected when interest rates rose.
“A lot of people are more exposed than they otherwise would have been,” he said.
“Before the scheme, people were more limited in what they could borrow by the deposit constraint. With that constraint gone, they have been borrowing more.”
Despite the warnings, government officials maintain that the scheme remains stable, citing current default rates that are lower than the broader market.
The scheme has been popular since its October expansion. Picture: Rohan Kelly
Housing Australia official Emma Jarman revealed that as of the end of December, nearly three-quarters (73 per cent) of loans under the scheme were ahead on repayments, with 26 per cent on schedule.
Only 0.3 per cent were in arrears by 90 days or more, and roughly 1,000 borrowers (0.8 per cent) were on hardship plans, according to Housing Australia.
By comparison, Commonwealth Bank reported 0.63 per cent of its home loan book in 90-plus-days arrears, and ANZ reported roughly 0.75 per cent.
Labor senator Tim Ayres dismissed concerns regarding the contingent liability, arguing that borrower responsibility has mitigated the financial threat.
Treasurer Jim Chalmers announced changes to the First Home Guarantee Scheme in October. Picture: Getty
“So it’s an unquantified liability, but … it’s a very, very, very, almost infinitesimally small rate of having to pay it out,” Senator Ayres told the committee.
Mr Algar suggested those accessing the scheme have an eye on the future.
“My advice for anyone borrowing money is to be crystal clear on budget and factor in what the future might hold,” he said.
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