Low deposit home loans
Saving a home deposit can seem impossible, especially if you're striving for a six-figure deposit. But as our home loan experts reveal, you may be able to buy a home with less, even as little as a 5% deposit.
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Low deposit home loans have loan to value ratios (LVRs) of 90-95%, meaning you borrow 90-95% of the property's value, and you pay a deposit of 5-10%. These types of home loans let Australian borrowers buy properties sooner, as you don't have to save a full 20% deposit. In some cities, like Sydney and Melbourne, a 20% deposit can be a six-figure sum.
Low deposit home loans often come with higher rates, and with the extra cost of lenders mortgage insurance (LMI), which can amount to several thousands of dollars. Lenders may also scrutinise your loan application more carefully, which we'll explain in more detail below.
Here's everything you need to know about low deposit home loans and how to apply for a loan that gets you on the property ladder sooner.
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What's in this guide?
- What is a low deposit home loan?
- Can I get a home loan with a 5% deposit?
- What is lenders mortgage insurance?
- How do I compare low deposit mortgages?
- How to apply for a low deposit home loan
- The pros and cons of a low deposit home loan
- No deposit loans, guarantors and other questions
- Find a low deposit home loan in your state or territory
What is a low deposit home loan?
Most Australian home loans require a 20% deposit. If your deposit is less than 20% of the property's purchase price, you will need to apply for a low deposit home loan.
Low deposit home loans are exactly the same as other home loans, but they may have slightly higher interest rates to compensate for the fact that the bank is taking on a higher risk when accepting your loan.
Borrowers who take out low deposit home loans generally have to pay lenders mortgage insurance (LMI), although there are ways to avoid it – more on that soon.
Loan to value ratio, or LVR, is home loan jargon for minimum deposit size. Most home loans have maximum LVRs of 80%, which means you need to provide 20% of the property purchase price as a deposit. But home loans also have a maximum insured LVR, which can be 80% or higher.
If a home loan has a maximum insured LVR of 90% or 95%, then it's a low deposit home loan.
Here's a simple breakdown:
- A loan has a maximum LVR of 80% and a maximum insured LVR of 80%. You need a 20% deposit. This loan is not a low deposit home loan.
- A loan has a maximum LVR of 80% and a maximum insured LVR of 90%. You can get this loan with a 20% deposit (and pay no LMI) or a 10% deposit (and pay LMI). This is a low deposit home loan.
Can I get a home loan with a 5% deposit?
According to Mortgage Choice CEO Susan Mitchell, yes, it is possible to get a home loan with as little as just 5% deposit saved.
"You can secure a home loan with a 5% deposit, plus stamp duty and other costs associated with property buying, but you may be required to pay Lender's Mortgage Insurance (LMI)," she says.
"The cost of LMI will vary depending on the size of your deposit and the purchase price of the property you're buying."
First home buyers who meet the eligibility criteria may be also be able to secure a home loan with a 5% deposit without paying LMI, thanks to the government's First Home Loan Deposit Scheme (FHLDS). There are 10,000 places available under the scheme each financial year.
Mitchell says to keep in mind that the interest rate may go up if your home loan loan deposit is lower than 20%.
"Most lenders will price home loans based on LVR bands, so you may face a higher interest rate if you contribute a smaller deposit," she says.
What is lenders mortgage insurance?
If you buy a property with a small deposit your lender views you as a higher risk borrower. This means you have to pay an LMI premium when you get the loan.
Even though you are the one paying the premium, lenders mortgage insurance does not protect you as a borrower. It protects your lender in the event that you can't repay your loan. Essentially, you are taking out this insurance to reassure the bank that if you can't repay the loan for any reason, insurance will kick in and the lender won't be left out of pocket.
LMI premiums vary depending on your deposit size, property value and loan amount. It can add thousands or even tens of thousands to your loan.
For example, a $600,000 loan with a $60,000 (10%) deposit could generate an LMI premium of around $13,000. Understandably, LMI is one of the biggest costs of buying a property that low deposit borrowers need to budget for.
Can I get a low deposit mortgage and avoid paying LMI?
If you have a parental guarantor to guarantee part of your deposit you can get a low deposit home loan while avoiding LMI.
Eligible first home buyers may also be able to borrow 95% of their home's value under the First Home Loan Deposit Scheme. In this scheme, the federal government acts like a guarantor, in partnership with specific lenders, and the borrower can avoid paying LMI premiums. The cost savings here can be significant and help you buy your own home sooner.
How do I compare low deposit mortgages?
When looking at low deposit home loans, the same basic principles apply for any home loan comparison. The biggest difference is you need to pay more attention to the maximum insured LVR that is on offer.
The main considerations are:
- Interest rate. With every home loan, a low interest rate means a cheaper home loan with lower repayments. Review and compare the most competitive interest rates available.
- LVR. Make sure the loan you are looking at has a maximum insured LVR of 90% or higher, if you don't have a 20% deposit saved.
- Loan type and repayments. Your loan has a purpose: to fund an investment property or your own home. Depending on this purpose, your loan type and repayment type may be principal and interest or interest only.
- Fixed or variable. You can choose between a fixed home loan rate or a variable rate. Fixed rates offer more certainty but less flexibility. Variable rates can change up or down, but tend to have more features and are less costly to refinance.
- Loan fees. Most home loans have fees, such as ongoing monthly account keeping fees or annual package fees.
- Features. Some home loans allow you to make extra repayments or come with an offset account. These features can help you pay less interest and/or pay off your home loan sooner, so look for a loan with features you can benefit from.
- Lender. Some lenders are small with few branches or "bricks and mortar" premises. Others are entirely online, while some still have extensive branch networks and in-person support. Different lenders may be willing to lend you more than others, or may be more accepting of low deposit borrowers. Some lenders don't offer any home loans to borrowers with deposits under 20% – which is why you need to focus your research on those lenders whose loan criteria suits low deposit borrowers.
How to apply for a low deposit home loan
It can be harder to get a loan with a lower deposit as the bank wants to make sure it's not taking on a big risk. This means you need to ensure your mortgage application is strong, with your paperwork in order and your everyday spending under control.
If your bank sees high credit card debt, low savings and a lot of Uber Eats, bar tabs and retail shopping in your bank statements, it may be worried about your spending habits, and less convinced that you will be responsible in repaying your loan on time every month.
Here are some tips to help you succeed when putting together your low deposit home loan application:
- Check your credit score. Strengthen your chances of success by making sure there are no issues with your credit history.
- Check where and what you're buying. Some lenders impose higher lending requirements on apartment purchases in certain postcodes. They might require a 20% deposit or even 30%, so check the credit policy with prospective lenders before shopping for property.
- Employment history. If you've been employed by the same company for several years, you'll be in a better position from a lender's point of view, because they'll view this as being steady employment. Lots of job changes can make them more nervous about your reliability.
- Examine your debts and spending. Strengthen your application by paying down debts such as credit cards – and as you repay them, lower the limits to avoid over-spending again. Try to limit your spending as much as you feasibly can before applying.
- Talk to a mortgage broker. Mortgage brokers don't just connect you to a lender, they help you find one that is likely to accept your application based on their eligibility requirements. Professional help might be just the thing you need.
Advice from an expert
Three tips from Marissa Schulze, mortgage broker, property developer and director of Rise High Financial Solutions.
Tighten up your spending
The most important thing for applicants of low deposit home loans is to review their living expenses and if they can, to tighten up their spending. Applicants should rein in their spending for the six months prior to applying for the loan.
Genuine savings and rental history
Some lenders like to see "genuine savings". That means the applicant has been consistently saving each month or fortnight to build up their savings bucket. If that's not the case and they've been given the deposit as a gift from parents then lenders often want to see that sum of money sitting in the applicant's account for three to six months before applying.
If the applicant is renting they can actually prove they have good rental history and use that to boost their application in place of genuine savings. Now that really only works for applicants who are actually renting through a property manager. Sometimes applicants renting from a private landlord will find that hard for the bank to accept. The banks trust the feedback from a property manager more than they would from a private landlord.
Don't make any big changes between pre-approval and settlement
Make sure your financial circumstances don't change from the time you apply for finance to at least settlement. A common mistake is that buyers get pre-approval and then quit their job or apply for a car loan or increase their credit card limit. People don't realise how that impacts their application. You need to keep your financial and employment situations stable from the time you apply until you settle and move in. Then you can do what you like.
The pros and cons of a low deposit home loan
There are benefits and drawbacks to buying property with a smaller deposit, so it's a good idea to work out exactly what suits your own situation.
Low deposit home loans allow you to buy a property faster. If you're buying a property for $500,000, a 20% deposit is $100,000. A 5% deposit is only $25,000 while a 10% deposit is $50,000.
It's far more realistic and achievable to save up $25,000 than $100,000, so low deposit loans enable you to get on the property ladder sooner.
Buying a property sooner means borrowing more and having a higher overall mortgage amount, but getting into the property market faster. If prices increase this puts you in a better position, because even with a small deposit, you're actually growing your equity and wealth via the property's capital gain in value.
A low deposit home loan means you may have to pay LMI premiums. This cost can range from several thousand dollars into the tens of thousands, depending on your deposit size and the cost of the property.
You may also pay more interest with a low deposit loan, simply because you're borrowing more money. Let's look at a basic example.
Full vs low deposit home loans
|Details||Low deposit||Full deposit|
|Deposit size||$25,000 (5%)||$100,000 (20%)|
|Interest rate (30-year loan)||2.60%||2.60%|
*LMI costs are estimates only and come from the Genworth LMI premium estimator.
The difference in cost is clear. With a 5% deposit you'll pay $14,871 in LMI (although you may be able to capitalise this cost onto your loan and borrow the LMI money along with your mortgage, so you don't need to pay the full amount upfront).
You'll also pay $300 more in repayments per month, or $3,600 a year.
You also need to consider how long it would take you to save $100,000 versus $25,000. It could take several more years to save a full $100,000 deposit in the example above, by which time home prices may have increased, meaning you need an even bigger deposit – or you have to pay LMI anyway, as your deposit is now worth less than 20%.
No deposit loans, guarantors and other questions
You can't borrow 100% anymore. These loans were available pre-GFC, but these days lenders just consider it too risky.
The exception to this is a parental guarantee. If your parents own a property they could potentially guarantee a portion of your deposit for you.
It's a little complicated and it's not an option for everyone; our guide more thoroughly explains how guarantor home loans work.
If your parents are even more generous and financially comfortable, they could gift you the deposit.
I need help saving a deposit
Whether you're saving up for a low deposit home loan or you want to build up a 20% deposit, the same savings principles apply. Build your deposit by:
- Cutting back on your spending
- Finding extra sources of income or side hustles
- Trying to get a pay rise
- Considering a high interest savings account or term deposit to earn more interest
- Taking advantage of government schemes if you are eligible (first home buyers can use first home owner grants as part of their deposit)
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Can I use super as part of my deposit?
Short answer: not directly. However, first home buyers can use extra super contributions to minimise tax and put it towards a deposit under the first home super saver scheme.
Investors can purchase investment properties through a self-managed super fund loan.
Can I buy a property with a $10,000 deposit?
It is possible to get a property with such a small deposit but there are other costs to take into account.
Let's say you were looking to buy a $200,000 property in regional Australia and you had $10,000 saved as a deposit. That's 5% of the property's value. If you successfully applied for a home loan with a maximum insured LVR of 95% then you could actually buy a home for $10,000.
If you were a first home buyer buying a newly built property and you qualified for a first home owner grant, you could even use this money as your deposit.
But if you only had $10,000 saved up for all your costs then you might fall short. Consider these additional costs:
- Stamp duty: If you're a first home buyer you may be able to avoid stamp duty with a property price this low. Check out our stamp duty guide to learn more.
- LMI: According to Genworth's LMI premium estimator, buying a $200,000 property with a $10,000 deposit means you also need to pay $4,727 in LMI premiums. This cost may be waived if you're a first home buyer and eligible for the FHLDS.
- Conveyancing costs: You'll need a conveyancer to handle the legal aspects of the sale. Conveyancers charge around $1,000-$2,000.
- Mortgage fees: Your lender may charge some upfront fees, plus a valuation fee. This could cost you several hundred dollars or more. And then there's the mortgage registration fee, too (around $100).
Find a low deposit home loan in your state or territory
Here's some more information about finding lenders, brokers and government support options for low deposit borrowers in your state or territory.
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