First Home Buyers Borrowing Record Amounts: Are They at Risk?

First home buyers are borrowing more than ever before. ABS data shows the average first home buyer loan surged 8.5% to a record $607,624 in the December 2025 quarter, with 31,783 new loans written - the biggest jump since late 2023. Government schemes like the 5% deposit guarantee and Help to Buy have opened the door for thousands of buyers. But with the RBA hiking rates to 3.85% and another rise potentially coming in May, are these new borrowers prepared for what's ahead?

The Numbers: A Record-Breaking Quarter

The ABS lending indicators for December 2025 paint a striking picture of first home buyer activity:

To put this in perspective, the average first home buyer loan was $560,000 just one quarter earlier in September 2025. That's a jump of nearly $48,000 in three months.

What's Driving the Surge?

Two major government policy changes have reshaped the first home buyer landscape:

The 5% Deposit Scheme

Launched in October 2025, the expanded First Home Buyer Guarantee lets eligible buyers purchase with just a 5% deposit, with the government guaranteeing the remaining 15% to avoid Lenders Mortgage Insurance (LMI). Unlike previous iterations, there are no income caps or limits on the number of places.

Around 20,000 buyers have used the scheme since launch. ABS head of finance statistics Dr Mish Tan confirmed the scheme is already showing up in the data: "The Australian government 5% deposit scheme has increased the eligibility criteria for first-home buyers and we are seeing the early effects of this in our data."

Help to Buy Shared Equity

Launched in December 2025, Help to Buy allows the government to contribute up to 40% of a new home's purchase price (30% for existing homes). Buyers need as little as a 2% deposit, and the government's equity share is interest-free.

The Risk: What Another Rate Hike Means

The February 2026 rate hike to 3.85% has already increased repayments for variable rate borrowers. NAB and Goldman Sachs are forecasting another 0.25% rise in May, which would take the cash rate to 4.10%.

For a first home buyer who borrowed $607,000 (the current average) with a 5% deposit at a variable rate around 6.44%, here's what the numbers look like:

An extra $193-$292 per month is significant for any household, but especially for first home buyers who may have stretched to enter the market with minimal savings remaining after their deposit.

The Affordability Squeeze

The combination of record loan sizes and rising rates creates a perfect storm for first home buyers:

• Smaller buffers: Buyers using the 5% deposit scheme enter with minimal equity. A 5% deposit on a $900,000 property is $45,000 - leaving little room for unexpected costs or rate rises.
• Competition with investors: Investor loans also rose 5.5% in the December quarter, with investors and first home buyers often chasing the same entry-level properties. Affordable suburbs are seeing faster price growth than premium areas.
• APRA's DTI limits: From 1 February 2026, APRA's new debt-to-income caps mean banks are scrutinising borrowing capacity more closely. Buyers who qualified last year may not qualify for the same amount today.
• Mortgage stress risk: 35% of Australian homeowners already report difficulty meeting repayments. First home buyers with large loans and small buffers are among the most vulnerable.

Are First Home Buyers Being Set Up to Fail?

Some commentators have raised concerns that government schemes, while well-intentioned, may be encouraging buyers to take on more debt than they can comfortably manage - particularly at a time when rates are rising, not falling.

Canstar's Sally Tindall has described the record loan size figures as "worrying," noting that buyers who borrowed at maximum capacity have very little room to absorb further rate rises.

However, it's important to note that banks still apply the standard 3% serviceability buffer when assessing loans. A buyer approved at 6.44% has been assessed at their ability to repay at approximately 9.44%. This provides some protection, though it doesn't account for cost-of-living pressures outside of the mortgage.

How to Protect Yourself as a First Home Buyer

1. Don't Borrow Your Maximum

Just because you're approved for $607,000 doesn't mean you should borrow that much. Leave a buffer of at least $200-$300 per month above your projected repayments.

2. Build an Emergency Fund First

Aim for 3-6 months of mortgage repayments in savings before buying. On a $607,000 loan, that's roughly $11,400-$22,800. This protects you from rate rises, job loss, or unexpected expenses.

3. Stress-Test Your Budget

Before committing, calculate what your repayments would be if rates rise by 0.50% or 1.00%. Can you still cover your expenses comfortably? If not, consider a lower price range.

4. Consider Fixing Part of Your Loan

A split loan (part fixed, part variable) gives you certainty on a portion of your repayments while keeping flexibility. This is especially relevant if another rate hike is coming in May.

5. Use an Offset Account

If you choose variable, an offset account reduces the interest you pay. Even $10,000 in an offset on a $607,000 loan saves approximately $645 per year in interest.

6. Get Independent Advice

A mortgage broker compares loans from 40+ lenders and can help you find the best rate and structure for your situation - at no cost to you. This is especially important when navigating government schemes alongside traditional lending.