Thousands of first-home buyers who scraped together just a 5 per cent deposit to get into the property market are now staring down a potential mortgage crunch — with warnings many could be pushed to the brink if interest rates rise again in 2026.
Fears are mounting that the Reserve Bank of Australia could deliver up to three more rate hikes this year, piling fresh pressure on already-stretched households and sending monthly repayments soaring.
New analysis from bRight Agent reveals those who relied on the government’s low-deposit scheme to buy are among the most exposed — having taken on larger loans with little room to move.
First homebuyers who purchased a property using the federal government’s 5 per cent deposit scheme are deemed most exposed to further interest rate hikes.
bRight Agent co-founder Angelina Scott said the combination of high debt and rising rates was creating a “perfect storm” for first-home buyers who purchased at the peak of their borrowing power.
“Many of these buyers did everything right — they saved hard, got into the market with the help of the 5% scheme, and locked in a home,” Ms Scott said.
“But the reality is they’ve taken on larger loans relative to their income, and that makes them incredibly sensitive to rate increases. Even small hikes can translate into hundreds of dollars more per month.”
The Federal Government’s First Home Guarantee scheme allows buyers to enter the market with as little as a 5 per cent deposit without paying lenders mortgage insurance — accelerating home ownership but also amplifying risk.
Many of these buyers are now sitting on minimal equity, leaving them dangerously exposed if prices dip or costs rise further.
RBA governor Michele Bullock will meet with the board next month to decide whether to raise interest rates again. Picture: Nikki Short.
“They’re also in the particularly dire position of not having a lot of equity in their property as a buffer against a downturn,” she said.
With cost-of-living pressures already biting, the cracks are starting to show.
“We’re already seeing early signs of stress,” Ms Scott said. “Homeowners are cutting back on discretionary spending and dipping into savings in order to try and keep up with their repayments.”
And the worst may be yet to come.
“And if there’s another three interest rate hikes in 2026 as Westpac are now predicting, then we expect many of these first home buyers will find themselves financially underwater,” Ms Scott said.
With selling costs alone eating up 2 to 3 per cent of a property’s value, even a modest downturn could tip recent buyers into dangerous territory.
“When you factor in that selling costs are around 2 to 3 per cent of the total value of the property, there doesn’t need to be much of a downturn to see a first home buyer in a financially dire position.”
It comes as new analysis by Compare the Market shows maximum loan sizes for average borrowers have shrunk by tens of thousands of dollars.
The comparison website looked at a single borrower with an average wage of $106,652, as well as a couple on average salaries with no dependants.
The single’s borrowing power could be up to $39,700 less than it was just a few months ago, if a third consecutive rate hike is confirmed in May, while the couple would see its borrowing power reduced by $80,400 after three quarter of a per cent rate increases.
Compare the Market economic director David Koch. Picture: Jono Searle
Compare the Market’s Economic Director David Koch said the rapid jump in interest rates had once again highlighted why mortgage stress testing matters.
“Not long ago we were enjoying rate cuts and looking forward to more, but the picture has completely changed this year — now it’s looking like all that mortgage relief will be reversed,” Mr Koch said.
“That has implications not just for people already paying a mortgage, but for anyone hoping to take out a new loan.
“Compare the Market’s research shows a typical Aussie couple trying to buy a home has seen their borrowing power potentially slashed by tens of thousands of dollars in just a few short months.
“These limits exist to stop people taking out silly‑sized loans they’ll struggle to service. And as this research shows, it doesn’t take many rate hikes for that maximum loan amount to fall away very quickly.
“That’s why I always encourage people to do their own mortgage stress testing and work out what’s realistically within their budget. You’ve got to ask yourself: what happens if you have kids, lose a job, or face a financial emergency? What loan would you still feel comfortable repaying in those situations?
“The big question right now is simple – could you still afford your repayments if interest rates were to rise another two or three times?
“As a rule of thumb, you really don’t want to be spending much more than a third of your income on repayments. That way, you’ve still got room for everyday bills, unexpected costs, and a bit left over for savings and peace of mind.”
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