RBA Governor Clears 5% Deposit Scheme on Stability Grounds

Governor Michele Bullock told the Senate the expanded scheme poses no financial stability risk, but warns rate rises still have more work to do.

First home buyers who've stretched to a 5 per cent deposit can take real comfort from Reserve Bank of Australia governor Michele Bullock's recent Senate appearance: the central bank is not worried the scheme is destabilising the housing market or pushing borrowers toward financial peril.

Appearing before the Senate economics legislation committee on Thursday 4 June, Bullock was questioned by Senator Andrew Bragg on whether the government's expanded 5 per cent Deposit Scheme was fuelling house price growth and creating negative equity risks. Her answer was measured but clear.

What the RBA Governor Actually Said

Bullock confirmed that the scheme — which allows eligible buyers to purchase a property with a deposit as small as 5 per cent — has already generated a visible response in lending data.

"We have observed that there has been an increase in first home buyer interest," she told the committee. "I think we've seen a lift in that and in credit issued to first home buyers. And we've also seen an increase in the loan-to-value ratios reflecting that, but we don't have any concerns that that's in any way threatening financial stability."

That's significant language. When the RBA governor says publicly that rising high-LVR lending does not threaten financial stability, it means the central bank's prudential watchdogs are not currently alarmed by this segment of the market.

On the much-debated risk of negative equity — where a borrower owes more on their loan than their property is worth — Bullock was equally calm.

"Negative equity matters if people get into trouble with their loans and then they have to sell their homes to meet that," she said. "That's why a strong employment market at the moment is really important."

She described the current extent of negative equity in Australia as effectively non-existent: "At the moment, if you look at negative equity, it's absolutely miniscule. It's not big at all. Practically no one is in negative equity."

The employment point is worth unpacking. Negative equity only becomes a financial crisis when borrowers can no longer service their loan and are forced into a distressed sale at a loss. As long as they stay employed and keep making repayments, a period of below-purchase-price property values does not need to trigger disaster. This is why a stable income is the most important risk buffer for any borrower — but especially those with a thin equity cushion.

Why the Rate Environment Still Matters

The reassuring data on negative equity does not mean 5 per cent deposit borrowers are insulated from rate risk. Bullock was frank in her opening address that the RBA still has inflation firmly in its sights.

"As you know, the Monetary Policy Board has increased the cash rate by 75 basis points in total this year," she told the committee. "These increases have been necessary to tighten financial conditions and slow growth in demand in the economy to ensure we get on top of inflation."

The effects take time to flow through: "It will take around one to two years for the effects to fully flow through the economy," she said. Headline inflation is expected to peak at over 4.5 per cent in the June quarter, with underlying inflation remaining above the 2–3 per cent target band until mid-2027.

For a buyer using a 5 per cent deposit, higher rates mean higher repayments and tighter monthly cash flow — particularly in the first few years before equity has meaningfully built. Any short-term softening in property prices is felt more acutely with a thin equity buffer than it would be for a borrower with 20 per cent behind them.

Bullock acknowledged the weight of the current environment on borrowers while reiterating the board's mandate: "High inflation hurts everyone. It reduces the purchasing power of all Australians and disproportionately affects those on lower incomes and the more vulnerable people in the community."

What First Home Buyers Using the Scheme Should Know

The scheme is a legitimate pathway to homeownership for buyers who would otherwise spend years accumulating a larger deposit while rents remain elevated. The RBA's own data confirms it is being used — and the central bank is not currently alarmed by the results.

But entering at 5 per cent deposit requires clear-eyed thinking about the trade-offs.

**Understand your LMI position.** Lenders Mortgage Insurance is a premium that protects the lender — not you — and adds to your total loan costs. Whether it applies in your situation, and how much it adds, is a key question to resolve before comparing loans. Our [LMI calculator](/calculators/lmi) can help you model the cost before you commit.

**Stress-test your repayments.** Bullock indicated that underlying inflation isn't expected back inside the target band until mid-2027, which signals that rates are unlikely to fall quickly. Use our [borrowing power calculator](/calculators/borrowing-power) to model your position at rates above current levels and confirm your budget holds through a prolonged period of elevated rates.

**Compare loan products carefully.** Being eligible for the scheme doesn't mean all lenders offer the same rate. Variable rates for high-LVR borrowers can vary significantly across the market. Browse [first home buyer loans](/home-loans/first-home-buyer) to compare what's available before settling on a lender.

The RBA governor's Senate testimony is a useful signal for borrowers weighing the scheme: the central bank is watching the trend closely, the negative equity risk is currently minimal, and employment is the most important protective factor. As The Adviser [reports](https://www.theadviser.com.au/borrower/48525-rba-dismisses-concerns-over-5-deposit-scheme), Bullock's comments reinforced that the Board will continue monitoring conditions — and that borrowers need to go in with eyes open and their financial position carefully stress-tested.