A low deposit home loan lets you borrow more than 80% of a property's value. This means you can save a 5-10% deposit and borrow the rest. It's a popular option for borrowers looking to buy their first home.
This page has over 20 low deposit home loans to compare and useful information on all the ways you can get these loans.
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The standard deposit size for most lenders is 20% of the property's value. In other words, borrowers need a loan-to-value ratio (LVR) of 80%. Low deposit loans come with an LVR of 90 or 95%. This means you can potentially get a mortgage with just a 5% deposit.
If you're buying an $800,000 property, a 20% deposit is $160,000. A 5% deposit is just $40,000. That's a huge difference.
There must be a catch, right?
There is. If you're borrowing more than 80% of a property's value you will have to pay lenders mortgage insurance (LMI) as well. Depending on how much you're borrowing this can be a significant cost, ranging from several thousand dollars up to 10 or even 20 thousand dollars.
You can capitalise your LMI, meaning you can add this cost into your borrowing amount. But this can affect how much you can borrow. Learn more about LMI and how it affects low deposit loans.
The low deposit trap: Be sure you have cash to cover all your costs
Saving a 5% deposit is much easier than saving a 20% deposit. But you need to make sure you have money saved up to cover all your other home buying costs. This includes LMI, stamp duty, government fees and upfront lender's fees.
Is it harder to get approved for a low deposit home loan?
While the banks might advertise that you can borrow up to 95% of the purchase price of your new home, it's important to realise that lending criteria still apply:
Good credit history. In order to get your loan approved at a high LVR like 95%, you will need to have a clean credit history. This means you should have no defaults showing on your credit report for missed payments on other bills.
Good employment history. You will also need to demonstrate that you have a stable employment history. This means showing that you've been in the same job for at least 6-12 months, or been working within the same industry in a similar role.
Genuine savings. If you can show where your 5% savings amount came from, this will go in your favour. For example, showing your savings account statements with regular deposits going into it will be viewed favourably.
Good asset position. The credit assessor will view your existing assets and consider them in terms of whether you're doing well based on your age and income. For example, if you're a first home buyer and you have 5% savings and a car, this may be considered a positive asset position for your age and income.
Controlled debts. If you submit your home loan application and it shows that you have several credit cards, a car loan and a personal loan all outstanding, it's likely your loan will be declined. Consolidate your debts and pay off the most urgent ones first. Credit card debt is a bigger red flag for a lender than a HECS student debt, for example.
True no deposit mortgages are largely a thing of the past. Most banks won't throw 100% of a property's value at you. But there are some exceptions to this rule. These exceptions could be very useful for borrowers who are having trouble saving a deposit.
Gifted deposit. If you have generous parents with some cash in the bank, they can give you part of your deposit as a gift. If you're able to reduce your loan amount so you're only borrowing 90% of the purchase price, some banks won't ask you to prove that you have genuine savings. This means mum and dad need to come up with 10% of the purchase price and offer it to you as a gift. Learn more about using parental gifts as a deposit.
Guarantee from parents. If your parents own their home and they are happy to act as guarantors on your mortgage, you could borrow 100% of the purchase price of your new home without having any savings. Essentially, the bank takes a guarantee from your parents that is secured by the equity they have in their own property. Just be absolutely sure that you and your parents understand all the implications of guarantorship before you enter into this type of agreement.
Existing property. If you already have equity in your family home, you may be able to use this to secure the purchase for your next property. Effectively, this lets you borrow 100% of the purchase price of your new property without having any savings.
It's possible to take out a personal loan and use that as part of your deposit. For most people it's probably not a good idea. And the lender will still need to see 5-10% in genuine savings.
Using a personal loan for a deposit is a risky idea because these loans have much higher interest rates. You'll have to repay this loan while making mortgage repayments on top. And taking on another debt is a red flag for lenders and may make it harder to get approved.
If you're on a high income and want to buy a home in a hurry this strategy might be worth it. But for most people it's far from wise.
Can I use my super as a deposit?
There are two possible ways to use your super to buy property.
Self-Managed Super Funds (SMSF)
You cannot use money from a SMSF to buy a home. But you can use it to buy an investment property. This can be a good option for people looking to generate income and capital through an investment property but it doesn't help people looking to buy their own home with a low deposit.
First Home Super Saver Scheme (FHSSS)
First home buyers are able take out some of the extra money they've placed in their super funds to use for a house deposit. You can unlock up to $15,000 per financial year to a total of $30,000 maximum and put it toward your deposit.
There are also tax benefits to doing this, as super contributions are generally taxed at a lower rate.
Richard Whitten is Finder's home loans writer. He helps Australians understand the ins and outs of mortgages so they can find lower rates and make smarter property decisions. Richard trained as a high school English teacher at the University of Sydney, but found that mortgage management was more rewarding than classroom management. Before working at Finder he lived in Seoul, where he edited textbooks and ran communication courses for Korean corporations.
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