Labor’s 5% deposit scheme ignored regulatory warnings

The federal government's 5% home deposit scheme has faced renewed criticism from opposition leader Andrew Bragg, who claims it has turned a targeted assistance program into an "uncapped free-for-all" and accused it of "vote-buying." The scheme, which has helped more than 260,000 Australians to purchase their first home, has a default rate of less than 0.01%.

Treasury documents, obtained through a Freedom of Information request, revealed that government officials acknowledged a fall in house prices could result in some participants going into negative equity. While Treasury is unconcerned about broader financial system risks due to the federal government's guarantee on 15% of mortgages, Bragg argues that the scheme has led to riskier loans and a surge in high loan-to-value lending.

APRA and the RBA have previously warned about the dangers of high-LVR mortgages, stating that they expose lenders to higher risk of loss and increased likelihood of mortgage stress and default, particularly during economic downturns. Despite this, the scheme has faced growing pains as home values in Sydney and Melbourne experience a synchronized correction, putting recent first-home buyers who purchased using the 5% deposit scheme at risk of falling into negative equity.

Ultimately, taxpayers will be liable for any losses stemming from mortgage defaults, as the government guarantees 15% of all first-home buyer mortgages under the scheme.