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A low deposit home loan is any mortgage that lets you buy a property with a deposit below 20%. In mortgage terms, these low deposit home loans have loan to value ratios of 90-95%, meaning you can get these loans with 5% or 10% deposits.
Low deposit home loans let Australian borrowers buy properties faster. This is very helpful in a world where saving a deposit is often the biggest challenge. But low deposit home loans often have higher rates, and come with the extra cost of lenders mortgage insurance. Lenders also scrutinise your loan application more carefully.
Here's everything you need to know about low deposit home loans and how to get one.
Compare home loans with low deposit options
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What's in this guide?
- Low deposit home loans explained
- What is lender's mortgage insurance?
- How I do 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
Low deposit home loans explained
Most Australian home loans require a 20% deposit. If your deposit is below 20% it is considered a low deposit home loan. Low deposit home loans are similar to other home loans, but they tend to have slightly higher interest rates than 20% deposit loans, or lack premium features such as offset accounts.
And borrowers taking out low deposit home loans also have to pay lenders mortgage insurance (more on that below).
What does LVR mean?
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 a 20% 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.
If you get a home loan with a deposit under 20% you will need to pay lenders mortgage insurance (LMI).
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 or a 10% deposit (if you pay LMI). This is a low deposit home loan.
What is lender's 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.
Lenders mortgage insurance does not protect you as a borrower. It protects your lender in the event that you can't repay your loan.
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. Understandably, LMI is one of the biggest things low deposit borrowers need to worry about.
Can I get a low deposit mortgage while avoiding 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 can also 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.
How I do 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.
- Look at the interest rate. With every home loan, a low interest rate means a cheaper home loan with lower repayments.
- LVR. As discussed above, make sure the loan you choose has a maximum insured LVR of 90% or higher if you don't have a 20% deposit saved.
- Look at the loan type and repayments. Make sure the loan matches your loan purpose (investor or owner occupier) and consider your repayment type (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 easier to refinance.
- Loan fees. Most home loans have fees, and the fewer the better.
- Features. Some home loans allow you to make extra repayments or come with an offset account. Find a loan with features you need.
- Choice of lender. Some lenders are small or entirely online while others 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%.
How to apply for a low deposit home loan
It can be harder to get a loan with a lower deposit. You need to make sure your mortgage application is strong, with your paperwork in order and your spending under control.
Here are some tips to help you succeed:
- 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%. It's worth checking with prospective lenders before applying.
- 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.
- Examine your debts and spending. Strengthen your application by paying down urgent debts such as credit card debt. 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 reign 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 situation 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. It's vital that you know exactly what works for your own situation.
Low deposit home loans allow you to buy a property faster. If you're buying a property for $500,000 then a 20% deposit is $100,000. A 5% deposit is only $25,000 while a 10% deposit is $50,000.
Buying a property sooner means borrowing more but getting into the property market faster. If prices jump up suddenly this puts you in a better position. Even with a small deposit you're actually growing your equity value via capital gain.
And sometimes saving a 20% deposit just feels like an impossible goal, especially if you're paying a lot of money in rent.
A low deposit home loan means you 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 also pay more interest with a low deposit loan. That's simply because you're borrowing more money. Let's look at a basic example.
Full versus 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 can capitalise this cost onto your loan and borrow the LMI money along with your mortgage). You'll also pay $300 more in repayments per month, or $3,600 a year.
Speed and savings
But you also need to consider how long it would take you to save $100,000 versus $25,000. Assuming you have a 5% deposit in the example above, you're paying $2,002 in monthly repayments. If you were to save this money instead each month (assuming you didn't have to spend it on rent) it would take a little 37 months to save the extra $75,000 needed to reach a 20% deposit.
That's three whole years.
No deposit loans, guarantors and other questions
You can't really borrow 100% any more. Lenders just consider it too risky (a lesson they learned from watching the GFC unfold in other countries). The exception to this is a parental guarantee. If your parents own a property they could theoretically guarantee a portion of your deposit for you.
It's a little complicated and unfortunately it's not an option for everyone. Read our guide to learn more about guarantor home loans.
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.
- Try to get a pay rise if you can.
- Consider 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).
Want to give your savings a boost?
The Finder app hunts down personalised ways for you to save cash. You could save on your bills, mobile plan, credit card, insurance, plus more. Pop in your phone number below to get your download link.
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 house 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 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.
- Conveyancing costs: You'll need a conveyancer to handle the legal aspects of the sale. Conveyancers charge around $1-2,000.
- 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 (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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