Federal Government 5pc deposit scheme borrowers most likely to be in negative equity, RBA review finds

Recent first-homebuyers who participated in the Federal Government’s 5 per cent deposit scheme are those most likely to have fallen into negative equity, according to Reserve Bank of Australia research.

The central bank has also modelled the prospect of a 20 per cent plunge in property prices across the country — and the impact of a cash rate hike to 5.6 per cent, which would be at the highest level since 2008.

The rate is now at 4.6 per cent after the RBA’s monetary policy lifted them to a 15-year high on Tuesday to combat stubbornly high inflation.

In its Financial Stability Review — designed as a health-check on the banking and borrowing system — released on Thursday, the RBA conceded that first-homebuyers falling into negative equity would have little impact on the broader system even though risks of house prices falling further remain.

Fewer than one per cent of households are in negative equity, the review said, but those who bought recently or who had a low-deposit mortgage were more likely to be in that situation. Negative equity is defined as the value of a property being lower than the borrower’s loan to buy it.

“This includes first-homebuyers participating in the Australian Government 5 per cent deposit scheme,” the RBA’s review stated.

“However, the potential risks to financial stability from these borrowers are mitigated by the structure of the scheme and the typical low-risk characteristics of most first-homebuyers.”

The RBA also estimated 5 per cent of borrowers would be at risk of defaulting on their mortgage should the RBA cash rate climb to 5.6 per cent — implying four more typical hikes of 25 basis-points each.

Under that modelling, inflation would rise from 4 per cent to 7 per cent and unemployment would soar from an existing five-year high of 4.6 per cent to a COVID-era level of 6.3 per cent.

“In this scenario, around two-thirds of these borrowers are estimated to have insufficient income to cover their expenses but have enough buffers to service their debts and essential expenses for at least six months,” the central bank said.

Another four hikes, on top of Tuesday’s increase, would impose another $495 to monthly repayments on an average new mortgage of $731,000, adding up to $5940 over a year.

The four increases since February will cumulatively add $475 to monthly repayments for the same-sized loan, with borrowers already set to pay $5700 more than they did in annual servicing costs when the banks pass on the latest increase from next week.

About two-thirds of borrowers have enough savings buffers to cover at least six months of mortgage payments and essential expenses, the RBA’s review found, but it noted the level of borrowers in severe financial stress would be below peaks recorded in 2024.

Some lower-income borrowers had already had to cut back spending on essentials and trading down the quality of some goods and services, the RBA said, and they may have had to sell assets and work more to service their mortgage.

The review also found that even if there was a uniform property price fall of 20 per cent from current levels, its system data suggested only about 5 per cent of mortgages would fall into negative equity.

The RBA also pointed out negative equity would not necessarily trigger a loan default, and many households could continue to service their loan.

“However, if a borrower becomes unable to service their loan and had to make the difficult and disruptive decision to sell their home, the vast majority would have enough equity to repay their loans in full,” the review stated, citing the recent strong property market and tighter lending standards imposed on banks.

“Being in positive equity gives borrowers the option to make a decision – though difficult and disruptive – to sell their property to fully pay off their loan if they experience acute financial stress, rather than falling behind on their payments.”

The number of borrowers who used the Federal Government’s 5 per cent deposit scheme who were in arrears or hardship was “contained”, the RBA said, and the ongoing strength of the employment market meant households could keep servicing their debts.