Low-Deposit Home Buyers at Risk of Negative Equity Amidst Falling Prices

Falling property values are increasing the risk of negative equity for some recent first-home buyers, particularly those who entered the market with very small deposits under the Australian Government’s expanded 5% Deposit Scheme.

Negative equity occurs when a borrower owes more on their mortgage than the property is currently worth. Buyers who entered with only a 5% deposit have a much smaller equity buffer, meaning even a relatively modest fall in property values can push them below their original purchase position.

Recent PropTrack analysis estimated that around 480 households using the scheme had moved into negative equity by August 2026, up from just 87 a month earlier. Although that remains only about 1% of scheme participants, the trend shows how quickly falling prices can affect highly leveraged buyers.

The pressure is not evenly spread across Melbourne. Separate analysis has identified some of the largest value declines in areas such as Manningham–West, where scheme-eligible properties were estimated to have fallen substantially since the program was expanded. Other parts of Melbourne have also recorded sizeable losses.

For buyers in Melbourne’s western growth corridor, the key issue is not simply whether prices have fallen, but how much equity they started with. A recent purchaser with a 5% deposit has far less protection against a downturn than someone who bought with a 20% deposit or has already paid down a meaningful portion of their loan.

This matters most for owners who may need to sell in the near term. If the sale price is below the outstanding mortgage balance, the borrower may need additional funds to repay the loan in full and cover selling costs.

However, negative equity does not automatically create a crisis for someone who can continue making repayments. The RBA notes that most borrowers remain financially resilient and that negative equity alone does not usually trigger default.

For first-home buyers in Melbourne’s west, maintaining a cash buffer, avoiding unnecessary additional debt and monitoring local property values can therefore be important while the market remains soft.

The broader lesson is that low-deposit schemes can help buyers enter the market sooner, but they also leave households more exposed to short-term price falls. In a declining market, buyers need to think not only about getting into a property, but also about how much financial flexibility they will have if values weaken further.

Overall, recent price falls have increased the vulnerability of some low-deposit first-home buyers, particularly those who purchased near market peaks. For Melbourne’s western growth corridor, buyers who plan to hold for the long term and can comfortably service their mortgage may be better positioned to ride out temporary declines than those who may need to sell quickly.