Bought With a 5% Deposit? What Falling Prices Really Mean for You

In short: Sydney prices are about 10% below their March peak, and some recent first-home buyers now owe more than their home is worth. That sounds frightening, but negative equity only really bites if you have to sell or refinance. If you can keep paying and stay put, your cash flow matters far more than this month’s valuation.

Every week, someone asks me a version of the same question:

“I bought last year with 5% down. Prices are falling. Did I make a mistake?”

It’s a fair question. And the honest answer is: it depends less on the market than most people think.

How we got here

Since 1 October 2025, the expanded federal 5% Deposit Scheme has let first-home buyers purchase with just 5% down and no Lenders Mortgage Insurance. Income caps and place limits were removed, and the price cap in Sydney rose to around $1.5 million.

It opened the door for a lot of people. One analysis estimates more than 28,000 NSW first-home buyers have used it since it expanded.

But a small deposit means a small cushion. And that cushion is now being tested.

What’s changed since then

Quite a lot.

Sydney dwelling values are now about 10% below their March 2026 peak, according to Cotality. Sydney’s auction clearance rate recently dipped below 50%. And after September’s hike, the cash rate sits at 4.6%, a 15-year high.

So prices are lower, and repayments are higher. That’s the squeeze.

What does “negative equity” actually mean?

It simply means you owe more than your home is currently worth.

Here’s a simple example. You buy for $800,000 with a $40,000 deposit, so your loan is about $760,000. If prices fall 10%, your home is now worth about $720,000.

On paper, you’re roughly $40,000 underwater.

That sounds alarming. But notice the words on paper.

When it becomes a real problem

Negative equity starts to matter in a few situations:

You have to sell. A job loss, separation or move for work could force a sale, and the paper loss becomes a real one.
You want to refinance. With little or no equity, switching to a cheaper loan may not be possible.
Rates keep rising. Higher repayments while values are still falling is a tough combination.
Prices fall further. Some forecasters, including SQM Research’s Louis Christopher, say a 20% peak-to-trough fall in Sydney “couldn’t be ruled out.”

Why most people don’t need to panic

Now the other side, because it matters just as much.

If you don’t sell, you don’t lock in a loss. What your home is worth today matters much less than what it’s worth when you eventually sell, possibly many years from now.

Most borrowers also have more breathing room than the headlines suggest. The RBA’s October Financial Stability Review found fewer than 1% of borrowers were in negative equity at the end of June, and the typical borrower had more than a year of repayments saved in offset or redraw.

And most first-home buyers didn’t buy a trade. They bought a home.

What I’m seeing on the ground

Here in North-West Sydney and the Hawkesbury, the conversations have shifted. Buyers are taking longer to decide, asking harder questions about repayments, and negotiating more firmly than they were earlier in the year.

And people who bought recently aren’t asking me what their home is worth anymore. They’re asking whether they can comfortably hold on.

The better question

When prices fall, most people ask: “What’s my home worth now?”

But that’s not the question that decides whether you’ll be okay.

The better question is: “Can I comfortably hold on until the market turns?”

If the answer is yes, today’s valuation is mostly noise. If the answer is no, that’s the problem to solve, and the sooner the better.

What it means for you

Recent buyers: focus on cash flow, not headlines. Could you still pay comfortably if rates rose again?
Build a buffer: even small, regular amounts into an offset or redraw account make a real difference.
If things get tight: talk to your lender early. You can ask for a hardship arrangement before you miss a payment.
Avoid panic selling: selling into a falling market is how a paper loss becomes a real one.
Thinking of buying with 5% down now? Lower prices may help, but stress-test your repayments at higher rates first.
Get advice for your situation: a broker or financial counsellor can look at your numbers. The National Debt Helpline (1800 007 007) is free.

The bottom line

Buying with a 5% deposit wasn’t a mistake for most people. It got them into the market.

What matters now isn’t what your home is worth this month. It’s whether you can hold on comfortably until conditions change.

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General information only. This isn’t financial advice and doesn’t consider your personal circumstances.