Bank of Mum and Dad vs the 5% Trap.
13 Dec 2025 Written By Emma.
"Note: I am not an economist. This is an opinion piece based on the conversations I’ve been having since the October 2025 policy changes."
The New Entry Barriers
On October 1, 2025, the Federal Treasury fundamentally altered the landscape of the Australian property market. By expanding the 5% Deposit Scheme (uncapping the number of places and removing income limits), the government essentially declared that the "deposit hurdle" was no longer the primary barrier to homeownership, and locked in a new price floor for Australian houses around the country.
I want to talk about something other than the impact this will have on house prices for a moment, and think about the impact this will have on first home buyers and the Bank of Mum and Dad.
Initially, this policy sounds like a silver bullet. For years, the narrative has been that young Australians can afford the mortgage, they just can't save the deposit while paying skyrocketing rents. The government listened. Now, a high-income professional couple earning $250k combined—who previously would have been ineligible due to income caps—can enter the market with just 5% down, bypassing Lenders Mortgage Insurance (LMI).
Logically, one might assume this would retire the "Bank of Mum and Dad" (BOMD). If the government is acting as the guarantor, why would parents need to risk their own equity?
Yet, as I speak with people this month, the BOMD hasn't closed its doors. In fact, it is arguably becoming busier than ever. The reason lies in the unavoidable mathematics of serviceability. The government has solved the entry problem for now, but in doing so, they may have inadvertently created a survival problem down the track.
The Mathematics of "Access" vs. "Living"
To understand why parents are still intervening, we have to look beyond the brochure and into the amortization schedule. Let's analyse a typical late-2025 scenario in Adelaide’s middle ring.
The Asset: An established, 3-bedroom home in a suburb like Colonel Light Gardens. Price: $880,000 (approaching the current median for quality stock). Interest Rate: 5.84% (Typical Standard Variable rate for high-LVR loans in late 2025).
Let’s compare the two pathways now available to buyers.
Pathway A: The Government Route (5% Deposit) You take advantage of the expanded scheme. You put down $44,000.
Loan Amount: $836,000 (95% LVR)
Monthly Repayment: ~$4,935
Annual Cost: ~$59,220
Pathway B: The BOMD Route (20% Deposit) Your parents step in, either gifting cash or providing a limited guarantee to bring the Loan-to-Value Ratio (LVR) down to 80%.
Loan Amount: $704,000 (80% LVR)
Monthly Repayment: ~$4,155
Annual Cost: ~$49,860
The Difference: Roughly $780 per month, or nearly $10,000 a year in post-tax cash flow.
This is where the "trap" emerges. The expanded scheme allows buyers to leverage themselves to the hilt. For a household on an average combined income, a $4,935 monthly repayment could represent 40-45% of their take-home pay. This creates a state of "Mortgage Stress" from day one.
The BOMD is no longer just solving a Savings Problem; they are now solving a Cash Flow Problem. Parents are intervening not because their kids can't get the loan, but because they know their kids can't live a reasonable life with the loan they can get.
Assessing My Own Bias: Who is this for?
As a broker, I have to check my own bias here. Strictly speaking, the 5% Scheme is "good" for business—it enables more transactions. However, the removal of income caps raises a difficult question about who this policy actually serves.
Previously, these schemes were welfare-adjacent, designed to help low-to-middle income earners escape the rental trap. By removing the income caps, the government has acknowledged a new demographic reality: the "HENRY" (High Earner, Not Rich Yet).
These are young professionals—lawyers, doctors, engineers—earning good money ($200k+ combined) but with zero asset base. They haven't had time to save $180k for a 20% deposit. The expanded scheme allows them to leverage their high incomes immediately.
However, high income usually correlates with high lifestyle costs (HECS debts, private health, inner-city rents, car leases). When you hand a high-income earner a 95% LVR loan, you are betting entirely on their income stream remaining unbroken. There is no buffer.
The Fragility of 95% Leverage
This brings us to the most concerning observation regarding the current market structure: Negative Equity Risk.
In a standard market cycle, property prices fluctuate. If you buy with a 20% deposit and the market corrects by 10%, you have lost half your equity, but the bank is still safe, and you can theoretically sell (though it would hurt).
If you buy with a 5% deposit and the market corrects by just 6%—a scenario that is statistically possible if the current labour shortages in construction ease or if rates hold higher for longer—you are effectively underwater. You owe the bank more than the house is worth.
The "Lock-In" Effect: Being in negative equity isn't a problem if you stay in the house for 10 years. But life rarely moves in 10-year blocks.
What if you need to relocate for work?
What if you divorce?
What if you have twins and need a bigger house?
If you are in negative equity, you generally cannot sell without bringing a check to settlement to pay the gap to the bank. You are effectively trapped in the property until the market recovers or you pay down the principal—which, at 5.84% interest, happens very slowly in the first few years.
This is the silent risk of the 5% scheme. It grants mobility into the market, but could strip mobility within the market later on.
The Shifted Role of the Family Balance Sheet
So, where does this leave the Bank of Mum and Dad?
We are potentially seeing a structural shift in intergenerational wealth transfer. Previously, the "Family Guarantee" was a gatekeeping mechanism—it was the key to the door. Now, it is becoming an insurance policy.
Families who have the means are choosing to leverage their equity despite the availability of the 5% scheme. Why?
Risk Mitigation: They prefer the family carries the risk (via a guarantee) rather than the child carrying the excessive debt serviceability load.
Rate Tiers: Loans with an 80% LVR often attract better interest rates than 95% LVR loans (even with government backing, banks still price for risk).
Buffer Creation: It provides the child with an immediate equity buffer against market volatility.
We are effectively seeing a two-tier First Home Buyer market emerge:
Tier 1 (The Leveraged): Buyers using the Government Scheme. High debt, high monthly costs, high sensitivity to rate rises, zero equity buffer.
Tier 2 (The Backed): Buyers using the BOMD. Lower debt, manageable costs, 20% equity buffer.
Conclusion: The Illusion of Choice
The expansion of the 5% Deposit Scheme is a significant policy shift that acknowledges the reality of asset inflation. It admits that saving a 20% deposit via wages alone is becoming mathematically improbable for many.
However, an "accessible" loan is not necessarily a "safe" loan.
While the government has removed the regulatory friction of entering the market, they cannot remove the financial friction of servicing the debt. The Bank of Mum and Dad remains the only mechanism capable of addressing the latter (at the BOMD’s detriment).
If you are considering the 5% route, you need to look at your finances with brutal honesty. The question is no longer "Can I get a loan?"—the government has ensured the answer is likely yes. The question is now, "Can I afford the life that comes with this loan?"
If the answer is shaky, and you have the option of family support, that conversation with your parents might still be the most important financial discussion you ever have.
By Emma.
