What Happens If I Buy With 5% and the Market Drops? Your Complete Guide to the FHB Expanded Guarantee Starting October 1st


The dream of homeownership feels closer than ever with the Australian Government’s expanded First Home Guarantee (FHG) scheme launching October 1st, 2025. For the first time, all eligible first-home buyers can enter the market with just a 5% deposit, unlimited places, and no income caps. But alongside this opportunity comes a critical question that keeps many potential buyers awake at night: “What happens if I buy with 5% and the market drops?”

At Investors Choice Mortgages, we believe in empowering you with complete transparency about both the opportunities and risks ahead. Having guided clients through multiple market cycles over our 19 years in business, we understand that smart first-home buyers want honest answers, not just sales pitches.

Woman sitting on a couch working on a laptop, surrounded by property maps, charts, a calculator, and a coffee mug, planning her first home purchase

Key Takeaways

The Bottom Line: While buying with 5% deposit and experiencing a market drop could result in temporary negative equity (where your loan exceeds your property value), this doesn’t spell disaster if you don’t need to sell immediately. The key is treating your first home like an investment from day one, choosing a property with strong capital growth potential and holding for the long term.

What’s Changed: From October 1st, 2025, the expanded FHG removes all previous barriers: no place limits, no income caps, and significantly higher property price caps across Australia.

The Smart Strategy: Research-based property selection combined with expert mortgage structuring can protect you against market volatility while positioning you for long-term wealth creation.

Your Next Step: Book a consultation with our specialised first-home buyer expert brokers who understand both the opportunities and risks of the current market.

Understanding Market Risk: What Really Happens When Property Values Drop

The Reality of Negative Equity

When you purchase a property with a 5% deposit, you’re borrowing 95% of the property’s value. If property values decline, you could find yourself in a position where your outstanding loan balance exceeds your property’s current market value; this is called negative equity.

Example Scenario:

  • Purchase price: $800,000
  • Your 5% deposit: $40,000
  • Loan amount: $760,000
  • If property values drop 10%: Property now worth $720,000
  • Negative equity: $40,000 ($760,000 loan minus $720,000 value)

Why This Isn’t Necessarily a Crisis

Here’s what many first-home buyers don’t understand: negative equity only becomes a real problem if you’re forced to sell during the downturn. If you can continue making your mortgage payments and hold the property long-term, market cycles typically recover.

Historical Context: Australian property markets have shown resilience over the long term. While short-term fluctuations occur, properties purchased in well-researched locations with strong fundamentals have historically recovered and exceeded previous highs within 5-10 years.

The Critical Factors That Protect You

  1. Serviceability Over Everything The most important protection against market risk isn’t the size of your deposit; it’s your ability to service the loan comfortably. This means:
  • Ensuring your mortgage repayments don’t exceed 28-30% of your gross income
  • Maintaining stable employment
  • Having emergency savings beyond your deposit
  1. Location Research and Capital Growth Potential This is where treating your first home like an investment becomes crucial. Properties in areas with:
  • Population growth
  • Infrastructure development
  • Employment opportunities
  • Limited supply tend to recover faster and grow stronger over time.
  1. Long-term Mindset First-home buyers who purchase with a 5-7 year minimum hold strategy are far better positioned to weather market fluctuations than those planning to sell within 2-3 years.

The Game-Changing FHB Expanded Guarantee: What’s New from October 1st

Unprecedented Access

The expanded First Home Guarantee represents the most significant change to first-home buyer assistance in decades. Here’s what’s transformative:

No Place Limits: Previously, only 35,000 guarantees were available annually. Now, every eligible first-home buyer can access the scheme.

No Income Caps: The previous income restrictions ($125,000 for individuals, $200,000 for couples) have been completely removed.

Higher Property Price Caps: Caps have increased dramatically across all states:

  • Sydney: From $900,000 to $1.5 million
  • Melbourne: From $800,000 to $950,000
  • Brisbane: From $700,000 to $1 million
  • Perth: From $600,000 to $800,000
  • Adelaide: From $600,000 to $750,000

How the Guarantee Protects You

The government guarantee means you avoid Lenders Mortgage Insurance (LMI), which can save tens of thousands of dollars. For an $800,000 property with 5% deposit, LMI could cost around $35,000 money that stays in your pocket with the FHG, or not an extra loan you need to take, traditionally LMI (which protects lenders not you; is on top of the loan).

Important Note: The guarantee protects the lender, not you as the borrower. You’re still responsible for all loan repayments, but it enables access to the market with a smaller deposit.

Eligibility Made Simple

To qualify for the expanded FHG from October 1st:

  • Australian citizen or permanent resident
  • At least 18 years old
  • Haven’t owned residential property in the last 10 years
  • 5-20% deposit of the property’s assessed value
  • Intend to live in the property as your primary residence
  • Use a participating lender (we know who is a participating lender at Investors Choice Mortgages and our partner brokers)

Why Smart First-Home Buyers Choose Investors Choice Mortgages

Our Unique Approach: More Than Just Mortgages

Under the leadership of Jane Slack-Smith, twice-awarded Australian Mortgage Broker of the Year, Investors Choice Mortgages has spent 19 years developing a unique approach that treats every property purchase as part of a broader wealth-building strategy.

The Financial Freedom Framework: We don’t just help you get a loan; we help you understand how your first home fits into your long-term financial goals. This includes:

  • Research-based property analysis
  • Long-term wealth-building strategies
  • Connection to trusted allied professionals
  • Ongoing support beyond settlement

Our Specialised FHB Expert Brokers

Recognising that not every broker is right for every client, we’ve curated a network of specialised first-home buyer expert brokers who understand:

  • The intricacies of the expanded FHG scheme
  • How to structure loans for long-term flexibility
  • Market research and property selection strategies
  • Risk management for 5% deposit buyers

The Investors’ Choice Difference

Experience: 19 years navigating market cycles, policy changes, and helping clients build wealth through property.

Recognition: Jane Slack-Smith’s double recognition as Australian Mortgage Broker of the Year demonstrates our commitment to excellence and client outcomes.

Education: We don’t just arrange loans, we educate you about your options, risks, and opportunities so you can make informed decisions.

Transparency: We disclose all fees and commissions upfront, ensuring you understand exactly what you’re paying and why.

Network: Our connections to buyers’ agents, financial planners, accountants, and other property professionals mean you have a complete team supporting your success.

Protecting Yourself in a 5% Deposit Purchase

The Research-First Strategy

  1. Capital Growth Analysis Before you fall in love with a property, analyse its growth potential:
  • Historical price trends in the suburb
  • Planned infrastructure developments
  • Population growth forecasts
  • Employment opportunities in the area
  • Supply and demand dynamics
  1. The extra% Rule for Serviceability: Ensure you can afford repayments even if interest rates rise by 1-2%. This buffer protects you if rates increase or your circumstances change.
  2. Choose Your Loan Structure Wisely
  • Consider offset accounts to reduce interest and maintain flexibility
  • Understand whether fixed or variable rates suit your situation
  • Maintain the ability to make extra repayments

Market Timing Considerations

While no one can predict short-term market movements perfectly, the current environment presents both opportunities and considerations:

Opportunities:

  • Interest rates are at historically reasonable levels after recent cuts
  • Expanded government support through the FHG
  • Potential for first-home buyers to enter before rates drop further

Considerations:

  • Some analysts predict the expanded FHG could add 3-6% to property prices in target price brackets
  • Spring selling season typically sees increased activity and competition
  • Building approvals and construction delays may limit supply in some areas

Your Next Steps: Taking Action with Confidence

The expanded First Home Guarantee starting October 1st, creates an unprecedented opportunity for Australian first-home buyers. However, success isn’t just about accessing the scheme—it’s about making smart decisions that protect and build your wealth over the long term.

The Investors Choice Mortgages Advantage

When you work with our specialised FHB expert brokers, you’re not just getting a loan—you’re getting:

Strategic Guidance: Understanding how your first home fits into your broader financial goals

Market Insight: Research-based analysis to help you choose properties with strong growth potential

Loan Structuring: Mortgages designed for flexibility and long-term wealth building

Professional Network: Access to buyers’ agents, financial planners, and other specialists

Ongoing Support: Relationship that extends well beyond settlement

Book Your Consultation Today

Don’t let this opportunity pass by while you’re still researching. Our FHB expert brokers are ready to help you understand your options, assess your readiness, and create a strategy that works for your specific situation.

Ready to take the next step? Book a time with our FHB expert broker. Your consultation will cover:

  • FHG eligibility assessment
  • Borrowing capacity analysis
  • Market research and property selection strategies
  • Risk management for 5% deposit purchases
  • Long-term wealth building opportunities

The expanded First Home Guarantee won’t last forever, and neither will current market conditions. The first-home buyers who succeed are those who combine opportunity with strategy, speed with research, and optimism with realistic planning.

Your homeownership journey starts with a conversation. Book yours today.

Conclusion

Buying your first home with a 5% deposit does carry risks, particularly if property values decline in the short term. However, with proper research, strategic planning, and expert guidance, these risks can be managed while you capitalise on the unprecedented opportunities created by the expanded First Home Guarantee.

The key is approaching your first home purchase like an investment—focusing on areas with strong capital growth potential, ensuring comfortable serviceability, and maintaining a long-term perspective. When market cycles inevitably occur, well-researched properties in good locations typically recover and continue growing.

At Investors Choice Mortgages, we’ve spent 20 years helping clients navigate market cycles and build wealth through property. Our specialised FHB expert brokers understand both the opportunities and risks in today’s market, and we’re committed to helping you make informed decisions that serve your long-term interests.

The expanded First Home Guarantee, starting October 1st may be the catalyst you need to stop paying someone else’s mortgage and start building your own wealth. But success requires more than just access to the scheme; it requires strategy, research, and expert guidance.

Your future self will thank you for taking action today. Download your free First Home Buyer Guide and book your consultation with our FHB expert broker. Together, we’ll create a plan that turns your first home purchase into the foundation of lifelong financial security.

Frequently Asked Questions

What if I lose my job after buying with 5% deposit?

This is why serviceability assessment is crucial before purchase. Ensure you have:

  • Emergency savings covering 6-12 months of expenses
  • Income protection insurance
  • A loan structure that allows payment holidays or reduced payments in hardship Our brokers help structure loans with built-in flexibility for unexpected circumstances.

Should I wait for the market to crash before buying?

Trying to time the market is notoriously difficult. Consider these factors:

  • While you wait, you’re paying rent with no equity building
  • Interest rates may rise while you wait
  • Property prices may continue rising, making entry even more difficult
  • The expanded FHG creates an immediate opportunity that may not last forever

Can I use the FHG for an investment property?

No, the FHG is only for properties you’ll live in as your primary residence. However, many clients later convert their first home into an investment property when they upgrade, creating a foundation for wealth building.

What happens if property prices drop 20%?

While a 20% drop would create significant negative equity, it’s important to remember:

  • You only realize a loss if you sell
  • Historical data shows recovery typically occurs within 5-10 years
  • Your focus should be on serviceability and long-term growth potential
  • This is why research-based property selection is crucial

How do I know if I’m ready to buy?

You’re ready when you have:

  • Stable income and employment
  • 5% deposit plus additional funds for purchasing costs
  • Emergency savings beyond your deposit
  • Clear understanding of ongoing costs (rates, insurance, maintenance)
  • Researched the area and property type thoroughly

What’s the difference between using a bank directly versus a broker?

Banks can only offer their own products, while our expert brokers have access to 30+ lenders participating in the FHG scheme. This means:

  • Better comparison of rates and features
  • Expert negotiation on your behalf
  • Ongoing support beyond settlement
  • Access to specialists who understand FHG requirements
  • Connection to other professionals you’ll need

Will the expanded FHG push up property prices?

Some market analysts predict 3-6% price growth in target price brackets due to increased demand. However:

  • This reinforces the importance of buying in areas with strong fundamentals
  • Early movers may benefit from entering before demand peaks
  • Long-term property growth is driven by more than just government schemes
  • Quality research and selection remain your best protection

Can I upgrade later if I buy with 5% deposit now?

Absolutely. Many clients use their first home as a stepping stone to build equity, then either:

  • Sell and upgrade to a larger property
  • Keep as an investment and buy a new primary residence
  • Refinance to access equity for investment properties The key is structuring your initial purchase to create these future opportunities.