How a low deposit loan can end up more expensive
Here's a simple example of 2 home loans with identical interest rates based on a $800,000 property and a 30-year loan term. The only difference is the deposit size. You can see how this changes both the loan amount (and therefore the repayments) and the LMI premium.
| Details | Low deposit | Full deposit |
|---|---|---|
| Property value | $800,000 | $800,000 |
| Deposit size | $40,000 (5%) | $160,000 (20%) |
| Loan amount | $760,000 | $640,000 |
| LMI costs | $34,982.80 | $0 |
| Interest rate (30-year loan) | 6.00% | 6.00% |
| Monthly repayments | $4,557 | $3,838 |
| Difference in monthly repayments | $719 more | $719 less |
In this hypothetical example, the low deposit borrower pays $34,982.80 in LMI premiums upfront, and an extra $719 a month in repayments. This is because they have to borrow more money.
Over the life of the loan this adds up to $139,006 in extra interest. Adding the LMI in, the low deposit home loan works out to be $173,988.80 more expensive.
But that doesn't mean the low deposit option is a bad idea
Choosing a low deposit home loan can still be worth it. You just need to have a clear idea of the costs involved. Plus, you can always minimise the interest charges over time by repaying more of the loan, or saving money in an offset account.
You also need to consider how long it would take you to save a 20% deposit. It could take you years.
Tighten up your spending
HI, I’m researching for a first home loan,have a small deposit saved a steady well paying job but numerous credit enquiries on my file from a few years ago.
I also have no credit cards or personal loans but am worried about further enquiries damaging my chances of securing a loan.
should I talk to my bank or a mortgage broker first?
Hi Justin,
Thanks for your question and for reaching out to us. I hope you are doing fine today.
When you apply for a home loan, banks and lenders check your credit file before you can get approved. Your credit file acts as a representation of your credit history and can include: unpaid bills, getting declined from a loan, late payments, if you have applied too often or if you have declared bankruptcy.
The lender will check your credit file and if you do have any negative marks, your options will be limited. All your past dealings with borrowed money are collected and are used as an indication of your future ability to make repayments. This is why your credit history is so important when applying for loans. You may read our guide on how your credit affects your ability to access home loans and tips on improving your chances of being approved for a home loan as well as details on how likely you are to be approved for a home loan
One of the tips in buying your first home is to speak to a mortgage broker.
Please take time to review the relevant details as well as the Product Disclosure Statements / Terms & Conditions when you are comparing options so you would be able to choose the one that suits your needs.
I hope this helps.
Cheers,
Judith
We are looking for a first home loan, we have a deposit of 60,000 but also have a personal loan for 40,000 which we have been servicing regularly.
We have a combined income of 9500 per month.
Is there currently a loan provider that would consider consolidating the personal loan in to the first home loan.
Hi Adelina,
Thanks for reaching out to Finder.
Refinancing to a debt consolidation loan involves reviewing your existing debts (and mortgage), and combine them together into a new mortgage that way you only have one monthly repayment vs. having several. You can check our guide on debt consolidation refinance for more details. Before you decide to refinance your mortgage with a debt consolidation loan, it would be best that you seek expert advise from a licensed mortgage broker or financial adviser
Cheers,
Joanne
why can’t income protection be classed as income?
Hi Belle,
Thank you for your inquiry.
As the term implies, income protection insurance is your “protection” by the time you lose your income if you are no longer able to work due to injury or sickness. So lenders may not consider this as your proof of income.
In terms of a home loan, your financial situation such as your income, assets, liabilities, and credit history will be evaluated by the lender when they consider your application. As for your income, lenders would need to check whether you have income from employment, business, pension, etc. Please note though that each lender has their own set of eligibility requirements and this differs from lender to lender. You can find some tips about lending criteria for home loans, which you may find useful.
Cheers,
May
Hi, when I was in my mid 20’s I became bankrupt. Now in my late 30’s it is no longer on my credit record, and I have $40k in savings averaging $3k per month. Do I have to declare my past bankruptcy even if well over 10 years ago? And if I do, would I still be able to access the 95% loans?
Hello Jezame,
Thank you for your question.
Yes.
Although information is eventually cleared from your credit file, if you’re declared bankrupt, your name and personal details are recorded on the National Personal Insolvency Index (NPII) permanently. It is a public record that can be viewed by anyone for a fee and maintained by the Australian Financial Security Authority (AFSA). Your lender would verify the date of discharge and will weigh in your current financial situation. If you have not declared this and your creditor found out, this may result in exclusion immediately.
95% loans are generally available for those with good or higher credit standings, as higher mortgage ratio increases “Default risk”. You may instead check Home Loans For Discharged Bankrupts.
Hope this helps.
Cheers,
Jonathan
Hi
I am 54 my wife is 44.I been working same job last 11 years we wan’t to build a new home. we have about $10,000 in savings never own our own home we are eligible for Victoria first home owners grant would banks look at us ?
Hi Robbie,
Thanks for your inquiry.
The $10,000 First Home Owner Grant is available to eligible applicants buying or building a new home valued at up to $750,000. From 1 July, a $20,000 First Home Owner Grant will be available to applicants buying or building a new home in regional Victoria valued up to $750,000.
Also, if you are buying your first home and it is valued at less than $600,000, you may be eligible for a duty reduction of up to 50%. This concession applies to new and established homes.
From 1 July, first home buyers purchasing a new or established home valued below $600,000 will be exempt from stamp duty, while buyers purchasing a new or established home valued between $600,000 and $750,000 will be eligible for a stamp duty concession, applied on a sliding scale.
Please feel free to read through our guide about First Home Owners Grant.
Hope this information helped.
Cheers,
Arnold