Ubank announces 10% deposit home loan: Could this become the new norm?
First home buyers can use a 10% deposit and refinancers can use 15% equity, all without paying LMI.
Digital lender Ubank is now offering home loan options for first home buyers with only a 10% deposit.
The same products also offer options for refinancers who have at least 15% equity.
Although both of those scenarios would normally mean paying lender's mortgage insurance (LMI), Ubank's products don't require it.
The bank says this will save first-time buyers up to hundreds of thousands of dollars in upfront costs.
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Why do banks charge lenders mortgage insurance?
In Australia, you usually need to save 20% of the property price as a deposit to get a home loan. You can often use a lower deposit, but you need to pay LMI to cover the lender risk.
LMI is to protect the lender in case you're unable to repay your home loan. That's because you're a higher risk to the lender as you 1) haven't been able to save a full deposit, and 2) are taking out a higher loan.
Why can lenders like Ubank not charge LMI then?
Lenders know that house prices are so much higher now and that it's harder to save for a deposit. Offering a lower deposit without the LMI cost is a strong way to support first home buyers (and get their business).
They still need to balance the risk though. To do that, they'll charge you a higher interest rate.
Ubank's 10% home loans are Neat Variable and Flex Variable. At the time of writing, the interest rate for both of those loans with a 90% LVR is 6.19%. If you had a 20% deposit you'd only be paying a rate of 5.44%.
But for most borrowers, paying more over time is significantly better than paying thousands of dollars upfront.
How much could you save upfront?
How much you could save depends on the property value. As a guide, here are some examples up to Ubank's $2,000,000 loan value cap for the low deposit products.
The below calculates the 10% deposit savings, but if you're refinancing you'd need at least 15% equity and so would have different savings.
| Property price | 10% deposit | 20% deposit | LMI with 10% deposit | Total upfront saving (deposit + LMI) |
|---|---|---|---|---|
| $600,000 | $60,000 | $120,000 | $11,772 | $71,772 |
| $900,000 | $90,000 | $180,000 | $20,379.60 | $110,379.60 |
| $1.2million | $120,000 | $240,000 | $29,484 | $149,484 |
| $1.7million | $170,000 | $340,000 | $41,769 | $211,769 |
| $2million | $200,000 | $400,000 | $49,140 | $249,140 |
Will we see more of this low deposit offering?
As house prices keep climbing it's getting harder for borrowers to save a 20% deposit. Over the last few years we've seen more products come on the market designed to help buyers with lower deposits, as well as government schemes which remove the need for LMI.
With house prices continuing to rise and the cost of living making it harder to save, we may very well see more and more lenders replace LMI obligations with higher interest rates.
But in some situations you can wrap the cost of your LMI into your home loan, so you should do the calculations to see whether not paying LMI over time works out more cost effective than paying a higher rate.
And if you're confused and overwhelmed, speak to a mortgage broker to work through all of your options.
Sources
Ask a question
What if your not a first time buyer but no longer own a property??
Hi Abbie,
With Ubank’s No LMI policy you don’t need to be a first home buyer. LMI is charged for any borrower with a deposit below 20%, and with Ubank eligible borrowers can be home buyers, refinancers or investors.