First-Home Buyer Loan Demand Is Down 22%. Is the Real Problem Deposit, Debt, or Borrowing Capacity?

Australia has spent years trying to solve one of the biggest barriers to first-home ownership: the deposit. But new lending data suggests the challenge facing buyers in 2026 goes much further than simply saving enough money to get through the front door.

Equifax's September Consumer Market Pulse shows first-home buyer loan applications fell 22.1% compared with a year earlier. This was the third consecutive month of increasingly large annual declines, following falls of 20.1% in August and 19.2% in July. Realestate

That is significant because government initiatives such as the Australian Government 5% Deposit Scheme are designed to help eligible buyers enter the market with a smaller deposit. Yet loan demand is still falling sharply. The data suggests that reducing the deposit hurdle does not necessarily solve the affordability equation when borrowing capacity, repayments and living costs remain under pressure.

The Deposit Is Only One Part of the Problem

For many first-home buyers, saving a 20% deposit can take years. A government-backed pathway allowing eligible buyers to purchase with a smaller deposit can therefore bring home ownership forward considerably.

But being able to provide the deposit and being able to comfortably service the mortgage are two separate tests. Equifax says average first-home buyer mortgage sizes are hovering around a record $743,000. At the same time, borrowers are dealing with elevated interest rates, strict serviceability assessment and cost-of-living pressure. Realestate

A buyer may therefore have enough savings to purchase but still find that the amount a lender is willing to advance is below what they need for the property they want.

Borrowing Capacity May Be the Bigger Constraint

Mortgage serviceability is designed to test whether borrowers could continue making repayments if conditions became more difficult. That is important for protecting both households and the financial system, but higher interest rates can substantially reduce the amount someone qualifies to borrow.

The RBA says the cash rate has increased by 100 basis points during 2026, while higher inflation and interest costs have reduced real household disposable income per person during the first half of the year. Reserve Bank of Australia

This means prospective first-home buyers can be hit from both directions. Their household budget becomes tighter while the maximum amount they can borrow may also decline.

A property becoming slightly cheaper does not necessarily solve that problem. If borrowing capacity falls faster than property prices, purchasing can actually become more difficult.

Large Loans Make Small Rate Changes Matter

Consider what a large mortgage means in practice. The larger the loan, the greater the dollar impact of each interest-rate movement. Buyers assessing a $700,000-plus mortgage are not simply thinking about whether they can obtain approval today. They also need to consider whether the repayment remains manageable if rates stay elevated, household expenses rise or income temporarily falls.

That may help explain why Equifax is seeing younger households take a more cautious approach to debt. Its analysis suggests prospective buyers are increasingly stepping back rather than taking on larger financial commitments in a sustained high-rate environment. Realestate

For some households, delaying the purchase may therefore be less about failing to save a deposit and more about deciding the repayment is currently too uncomfortable.

The 5% Deposit Scheme Still Has a Role

Falling loan demand does not mean the 5% Deposit Scheme is ineffective. The RBA says hardship and arrears among scheme participants remain contained, while first-home buyer arrears overall remain low. Participants are also assessed using APRA's serviceability framework, including the serviceability buffer applied to mortgage applications. Reserve Bank of Australia

The scheme can solve a genuine problem by allowing eligible buyers to enter sooner without having to accumulate a traditional 20% deposit. But it cannot remove every other constraint affecting home ownership.

It does not make interest rates lower. It does not increase household income. It does not remove living expenses. And it does not guarantee that the amount a buyer can borrow will match the price of the property they want.

A Smaller Deposit Can Also Mean Less Equity

The RBA notes that high-LVR lending increased after the expansion of the 5% Deposit Scheme, although it remains a relatively small part of overall housing credit. Recent buyers and borrowers with higher LVRs are also more likely to experience negative equity when property prices decline. Reserve Bank of Australia

That does not automatically make a low-deposit purchase unsuitable. It simply means first-home buyers should look beyond the minimum amount required to enter the market.

A strong buying plan should consider the deposit, expected repayment, emergency savings remaining after settlement, likely ownership costs and how much financial flexibility remains once the mortgage begins.

The Real Question Is Not Simply “Can I Buy?”

A lender might approve a particular amount. A government scheme might reduce the deposit hurdle. A property might technically sit inside the buyer's price range.

But the better question is whether all those numbers work together comfortably.

First-home buyer demand falling 22.1% suggests many Australians are already asking that question and deciding to wait. Realestate

For prospective buyers, the most useful starting point may therefore be understanding three numbers before searching seriously for a property: how much you can realistically borrow, what the repayment would look like at that loan size, and how much cash you would still have available after settlement.

At Loan & Own Mortgages, first-home buyers can review borrowing capacity, deposit options, pre-approval and suitable lending pathways before deciding how much property they can comfortably afford.

The goal should not simply be getting into the market as quickly as possible. It should be entering with a mortgage that remains manageable after the excitement of settlement has passed.

This article provides general information only and does not constitute personal financial, credit, tax, legal or investment advice. Lending eligibility, borrowing capacity and government scheme requirements depend on individual circumstances and lender assessment.