The Risks of the 5% Deposit Scheme
The Barefoot Investor, Scott Pape, has issued a warning to Australians about rushing into the five per cent home deposit scheme. His concerns were highlighted by a couple who shared their story of financial struggle after purchasing their first home in Sydney.
The couple had saved $40,000 and used the five per cent deposit scheme to enter the property market in early 2024. However, they soon found themselves in a difficult situation. After moving into their new apartment, they discovered major building defects, faced soaring strata fees, and dealt with harassment from neighbors.
Eighteen months later, they decided to move out and list the property for rent. Now, they are paying both rent and an investment loan, but there is no interest from potential tenants. They are also under pressure to reduce the lease by $150 below market value.
Their situation is dire. If they sell, they will break even, but with Sydney’s property prices rising, they risk being locked out of the market. If they hold on, they face the possibility of bankruptcy. Their question remains: what would you do?
They claim they followed all the Barefoot steps, but Pape disagrees, arguing that they did not adhere to his advice. He criticized Prime Minister Anthony Albanese and the Labor Party’s housing policy, which expanded the First Home Guarantee Scheme. This scheme allows all first-home buyers to purchase a home with just a five per cent deposit.
The government acts as a guarantor on the loan, eliminating the need for costly Lenders’ Mortgage Insurance. Originally introduced by the Coalition in 2020, the scheme was limited to low-income households and had a cap on the number of users.
Pape pointed out that the couple followed the policy of the current government, writing, “You didn’t follow Barefoot, you followed Albo and his dud policy: ‘Only Labor will help you buy a home right now!’”
He emphasized that their experience is a textbook example of what happens when urgency and fear of missing out (FOMO) take over. Pape questioned where the Barefoot steps advise taking out a loan with a five per cent deposit, stating that it doesn’t exist.
Pape explained why the scheme is so risky. When you only put down five per cent, you are highly leveraged. One unexpected cost, like skyrocketing strata fees, can put you in financial quicksand. He noted the pattern of rushing into buying and then rushing to sell.
He attributed this to people letting politicians fuel their FOMO to win votes. Pape advised people to slow down, take a breath, and make a plan. He suggested that the couple book a Barefoot Date Night to create a realistic game plan for their next steps.
Pape’s message is clear: the five per cent deposit scheme may seem appealing, but it comes with significant risks. He urges first-time homebuyers to be cautious and not be swayed by political promises. Instead, he encourages them to make informed decisions based on sound financial planning.
His advice is to avoid the trap of rushing into a decision and instead focus on long-term stability. The Barefoot Investor’s warnings serve as a reminder that homeownership should be a well-considered choice, not a reaction to external pressures.
By following the principles outlined by Pape, first-time buyers can navigate the complexities of the housing market more effectively. It’s essential to understand the risks involved and to make decisions that align with personal financial goals rather than short-term incentives.
In conclusion, while the five per cent deposit scheme offers an opportunity for some, it also presents challenges that must be carefully evaluated. The experiences of those who have entered the market through this scheme highlight the importance of caution and thorough planning. As the housing market continues to evolve, staying informed and making deliberate choices will be key to achieving financial security.