Will 5% deposit scheme pile more financial stress on vulnerable Australians?
The latest data from the Australian Financial Security Authority (AFSA) reveals a 5.3% annual increase in insolvencies, marking the third consecutive year of growth.
\While volumes remain below pre-pandemic levels, the uptick is a clear indicator of mounting financial strain, driven largely by excessive borrowing.
According to AFSA, 37.3% of debtors cited excessive borrowing as the root cause of personal insolvency, ahead of unemployment and business failure.
This shows that cost-of-living pressures and tighter lending from traditional banks have pushed many Australians – particularly younger cohorts – toward easier credit solutions like subprime and Buy Now, Pay Later (BNPL) lenders.
Among new insolvency entrants under 30, 65.2% reported BNPL debt.
But it’s not just households feeling the squeeze.
Business-related personal insolvencies – largely affecting sole traders and small business owners – made up just 28.8% of new insolvency filings but accounted for a worrying 78.8% of total new debt, highlighting the outsized liabilities and risks carried by self-employed Australians.
Many operate without the protections afforded to incorporated entities, leaving personal assets exposed when business cash flow collapses or contracts dry up.
The construction industry remains the most impacted, reflecting ongoing pressures such as cost overruns, payment delays, and contractor insolvencies.
SME operators, often trading on thin margins, are especially vulnerable. AFSA’s report also pointed to rising tax debts and personal guarantees on business loans as key triggers for insolvency in this segment.
Financial resilience declines
One in five debtors now enters insolvency with an asset-to-liability ratio below 10%, meaning they have less than 10 cents in assets for every dollar of debt.
This suggests that "financial resilience is declining”, said AFSA, with a growing share of Australians lacking the buffers needed to absorb economic shocks.
AFSA expects personal insolvency numbers to keep rising through to 2027, “driven by ongoing cost-of-living pressures and uncertain economic conditions”.
The expanded 5% deposit scheme could exasperate the issue.
Home guarantee scheme to push household debt higher
Cotality Head of Research Eliza Owen has warned first-home buyers to look beyond the headline lenders mortgage insurance (LMI) savings and consider the full financial picture of the First Home Guarantee.
“The real cost of a 5% deposit is in the interest,” Owen said, noting that while the scheme removes the barrier of LMI, it also means taking out a 95% LVR loan.
Over a 30-year loan, this higher LVR could see buyers pay tens – or even hundreds – of thousands more in interest compared to a 20% deposit scenario.
However, rising rents are shifting the value equation. With median rents rising, the scheme’s ability to reduce time spent renting can also made for substantial savings.
For example, in Sydney, shaving over 12 years off a deposit-saving timeline could equate to more than $500,000 saved in rent.
While interest costs rise, Owen’s analysis suggests that for many, entering the market sooner may outweigh the long-term debt burden.
Still, she cautioned that the scheme is a demand-side solution that does little to address the root causes of housing unaffordability – namely high deposits, low supply, and escalating rents.
