Key implication: Australia’s late-2025 spike in first-home buyer activity has shifted the mortgage market towards lower-deposit, policy-enabled borrowers — accelerating competition in acquisition, compressing pricing power, and lifting operational risk complexity for lenders. The winners will marry policy fluency with precision risk models and low-cost, digital origination.

The demand shock: policy meets pent-up intent

Fresh data from industry aggregator LMG points to the strongest quarter on record for first-home buyer (FHB) lodgements in Q4 2025, up 26% year on year. Broker reports indicate the surge was broad-based across the country, with Victoria lagging other states but still advancing, at around 11.7% growth. This caps a two-year rebuild in entry-level demand: the State of the Housing System 2024 noted FHBs’ share of new loan commitments had already jumped to roughly 31% during that period, supported by temporary concessions and targeted assistance.

The policy fulcrum is clear. The expansion of the federal 5% deposit support in 2025 lowered the deposit hurdle and de-risked lender participation. State-level measures amplified the effect — for example, the NSW budget reported more than 62,000 first-home buyers benefiting from purchasing power initiatives over recent years. As the Reserve Bank has observed in its analysis of price dynamics, policy support helps “first-time buyers to get a foothold in the market”, while “increased competition” also shapes mortgage pricing.

Strategically, this mix shift is more than headline volume. FHB borrowers skew to higher loan-to-income ratios, thinner buffers and longer tenors — requiring tighter credit selection and more proactive early-tenure risk monitoring. But they also display lower short-term churn when service levels are high, creating lifetime value potential that can justify front-loaded acquisition cost if underwriting is disciplined.

Competitive dynamics: five forces in motion

Porter’s lens helps explain the new equilibrium:

- Industry rivalry: Major banks and non-banks are contesting the same policy-enabled segment. Expect sharper rate discounts and fee waivers at the margin, compressing spreads.

- Buyer power: FHBs are price sensitive but broker-led. Aggregator platforms increase transparency, shifting power from lender brands to distribution partners and driving standardisation in credit policies.

- Supplier power: Wholesale funding costs remain a key swing factor for non-banks; majors with stable deposits can cross-subsidise acquisition. Any widening in term funding spreads will favour balance sheet scale.

- Threat of substitutes: Rent-versus-buy calculus narrows when policy lowers deposits. Build-to-rent schemes and shared equity pilots set an outside option that tempers extreme price moves.

- Threat of new entrants: Fintech originators can front-run with faster pre-approvals, but capital-light models face constraints in scaling low-deposit, higher-risk cohorts.

The near-term result is a race to frictionless origination, broker service excellence and surgical pricing. Margin leadership will hinge on cost-to-serve, not just headline rates.

Technology edge: turning ethics-compliant AI into underwriting advantage

Australia’s AI ecosystem is long on adoption but short on commercialisation outcomes, according to a 2025 landscape review, signalling a gap between pilots and P&L impact. That’s an opening. Lenders that productise AI in three seams will gain structural advantage:

- Pre-approval triage: Natural language and document AI to extract and validate income, expense and identity data can cut time-to-yes for broker-originated FHB files by days, lifting conversion. The Australian Government’s AI Ethics Principles provide the governance rails for explainability and fairness at meaningful scale.

- Early-tenure risk sensing: Machine-learning models tuned to thin buffers can monitor transaction data for strain signals in the first 12–24 months, triggering hardship outreach before arrears crystallise. The ATO’s work on governing general-purpose AI underscores the importance of auditability — a principle lenders can mirror to satisfy internal model risk and external assurance.

- Pricing discipline: Micro-segmentation that considers deposit source, property type and suburb-level volatility can preserve risk-adjusted margin without blunt across-the-board discounting.

Boards should insist on line-of-sight from AI use cases to loss-given-default, cost-to-acquire and pull-through metrics — or risk another round of innovation theatre.

Operational reality: where growth meets control

Scaling a 5% deposit-heavy pipeline stresses the middle and back office. Practical priorities include:

- Policy fluency at the coalface: Broker and frontline teams need codified eligibility checklists across federal and state programs within CRM workflows to minimise attrition.

- Red-team underwriting: Independent credit challenge for higher LVR deals and tighter debt-to-income thresholds; dynamic serviceability floors that reflect borrower energy and insurance costs.

- First-90-days playbook: Settlement-to-activation journeys with payment coaching, offset setup and insurance completion reduce early delinquency and cancellations.

- Claims and compliance: Government guarantee schemes introduce new reporting, attestations and audit trails. Build these into origination systems rather than relying on manual reconciliations.

Beyond banking: second-order effects for property and retail

Entry-level demand is a catalyst for downstream sectors. Builders and developers can recalibrate product to smaller footprints and regional infill where FHB budgets clear. Retailers and insurers should prepare for a mini-cycle in post-settlement spending; historically, new homeowners over-index on furnishings, appliances and cover in the first 90 days. Partnerships with brokers and lenders for targeted offers at unconditional approval can convert intent while acquisition costs are low.

For state treasuries, the mix shift influences stamp duty receipts and regional population flows. The State of the Housing System 2025 emphasises assistance targeted to aspiring first-home owners, including increased access for First Nations people, signalling that equity-focused design will remain part of the policy toolkit — and a planning variable for industry.

Outlook: heat without blow-off

Academic modelling of first-home ownership policies suggests that expanding mortgage borrowing capacity does not excessively inflate total housing demand and that any price lift does not fully offset improved affordability for targeted buyers. Coupled with the RBA’s observation that competition is a material influence on mortgage rates, the base case is firm but not frothy activity while policy support persists.

Scenario planning for 2026–27 should track three pivots: the cadence of federal guarantees, state-level eligibility tweaks, and funding cost volatility. If guarantees taper, expect a softer but more sustainable pipeline; if funding costs rise, balance sheet scale regains the upper hand; if both hold steady, AI-enabled, broker-friendly lenders will accumulate share.

What to do now: board-level moves

- Reprice to risk, not volume: Protect net interest margin with micro-segmented pricing instead of headline discount wars.

- Industrialise policy operations: Treat scheme administration as a core capability with clear ownership, KPIs and systems integration.

- Make AI accountable: Tie every model to a control, an explainability artefact and a P&L outcome; align with national AI ethics guidance.

- Broker-first service: Publish SLAs, eliminate document ping-pong and offer certainty of credit policy to be first call on FHB files.

- Early-tenure care: Invest in onboarding and hardship pre-emption to defend credit quality as FHB exposure rises.