Home loan Tips with Money Matchmaker®

Low Deposit Home Loans

Written by

Shaun McGowan

A low-deposit home loan allows a borrower to finance between 80% to 95% of a property’s value. In some rare cases, lenders may provide finance for 100% of the property value. Due to rising property prices, low-deposit home loans are popular with first-home buyers in Australia.

How do low-deposit home loans work?

Low-deposit home loans use Lender’s Mortgage Insurance (LMI) to offset risk to the lender in the case of a default. The LMI required by a lender is calculated using the Loan-to-Value Ratio (LVR) of your property.

Low deposit home loans

Loan-to-Value Ratio (LVR)

LVR is the amount of your loan compared to the purchase price of your home, expressed as a percentage. If you have a 20% deposit your LVR will be 80%.

LVR - loan to value ratio

Lender’s Mortgage Insurance (LMI)

If you have an LVR of less than 80%, you may need to pay lender’s mortgage insurance in order to secure a loan. This is a one-off cost that pays for insurance to cover your lender’s costs in the event you default on your loan.

When calculating the LMI you may be required to pay, a lender will consider:

  • The size of your deposit
  • The size of your loan principal
  • The level of risk you present as a borrower

LMI can vary from as little as $1,000 to more than $30,000 depending on the above factors.

LMI - Lenders Mortgage Insurance

Examples of LMI cost

Loan example 1Loan example 2Loan example 3

Property value

$500,000

$500,000

$500,000

Loan amount

$400,000

$450,000

$475,000

Deposit amount

$100,000

$50,000

$25,000

LVR

80%

90%

95%

LMI amount

$0

$7,920

$15,722.50

Note: these are only examples. For an accurate indication of how much LMI could cost you can contact your lender.

Low deposit home loan vs full deposit home loan

Low deposit home loans may be more expensive than full deposit home loans. Here’s an example of what the difference may be on two comparable loans with a 3% interest rate and a 30-year loan term.

First home buyer home loans

Example of low-deposit vs full-deposit home loan

Low deposit home loan exampleFull deposit home loan example

Property value

$500,000

$500,000

Loan amount

$475,000

$400,000

LVR

95%

20%

Deposit size

$25,000

$100,000

LMI cost*

$17,480

$0

Monthly repayment size

$2,003

$1,686

Total interest payable

$245,943

$207,110

Total loan cost (includes principal repayments)

$763,423

$707,110

* LIM cost is an estimate only. Contact your lender for an exact amount. **Learn more about home loan fees and repayment options.

Low deposit home loans for first-home buyers

Low deposit home loans are popular among first-home buyers as a way to get a foot on the ladder in the increasingly expensive Australian property market. There are a number of options available to first-home buyers who want to buy with a small deposit.

First Home Loan Deposit Scheme

The First Home Loan Deposit Scheme is a government initiative designed to help first-home buyers into the market. Under the scheme, the government will guarantee up to 10,000 low-deposit home loans a year for low and middle-income earners who fit eligibility criteria.

Buyers who are approved under the scheme will be approved for finance with a 5-20% deposit and no lenders mortgage insurance. All applications for the First Home Loan Deposit Scheme should be made through approved lenders, which include:

  • NAB
  • Commonwealth Bank
  • Beyond Bank
  • Bendigo Bank
  • Regional Australia Bank
  • Mortgage Port

If you successfully apply for the scheme it could save you tens of thousands of dollars over the life of your home loan.

Learn more about first-home buyer home loans.

Guarantor home loans

A guarantor home loan is a smart way to secure a low deposit home loan, and may even help you avoid paying LMI and higher interest rates.

To secure one of these loans you’ll need a guarantor - someone who is willing to help you by allowing the bank to use their property, cash as security. In most cases, guarantors are parents helping their children buy their first home.

Guarantor home loans pros and cons

Pros

  • You may be able to buy a home with a 0% deposit. Some lenders may even allow you to borrow up to 105% of the property value. 
  • May feature discounted interest rates.
  • Allows you to avoid paying LMI.

Cons

  • Some lenders limit guarantor loans to first-home buyers.
  • Should you default on your loan the guarantor could be liable for the full amount. 
  • In the worst-case scenario, the bank could sell your property and your guarantor’s property to recoup their losses. 

If you’re lucky enough to have parents or immediate family members who are willing and able to guarantee your loan using their property as security this can be a great way to buy a property straight away, without all the extra costs like LMI.

Applying for a low deposit home loan

You can apply for a low-deposit home loan with the majority of lenders in Australia, such as:

  • Retail banks
  • Mutual banks and credit unions
  • Non-bank lenders
  • Mortgage broker

Applying for a low-deposit home loan may require greater documentation and preparation, as lenders often consider these types of loans riskier than standard home loans.

Learn more about applying for a home loan.

Documents you'll need to apply for a home loan - proof of savings, investments, shares

Top 6 low deposit home loan tips

There are a few steps you can take to give yourself the best possible chance when applying:

1. Speak to a mortgage broker

A good mortgage broker will help you improve every aspect of your application to improve your chances. They may also be able to advise you which lenders are more likely to accept your application.

Home loan mortgage broker

2. Make the most of first-home buyer incentives and grants

There are a number of grants and incentives that aim to make it easier for first-home buyers to get on the property ladder. These include the First Home Owner Grant, which you may be able to add to your deposit. Make sure you’re aware of these incentives before you apply as they may increase the size of your deposit and decrease your costs.

3. Stay in the same job

Don’t switch jobs or industries before applying for a home loan. If you’ve been in the same job for several years that tells lenders your income is secure and you’ll be able to make repayments.

What does Business Insurance cover

4. Clean up your spending

Your lender may request to look at up to 6 months of your bank transactions. They’ll look at your income VS spending and use what they find to help them assess your application. Spend less before you apply and your lender may be more likely to approve your application.

5. Pay off debts

Debt affects your ability to make repayments and may imply that you’re spending more than you earn. Prove to your lender that you’re financially responsible by paying off all your debt before you apply (particularly credit cards, personal loans, car loans and other high-interest debt).

Pay off your defaults to improve your credit rating

6. Increase your genuine savings

Genuine savings is money you’ve earned and put aside in account yourself. It shows lenders that you can manage your finances and that you’ll be able to make repayments. The more you save, the better your application will appear.

Once you’ve secured pre-approval for your low deposit loan make sure that you keep your financial and employment situation the same. Your lender can still deny your application when it comes to formal approval if your circumstances have changed.

Summary

Thanks to high property prices low deposit loans have become increasingly common in Australia, especially among first-home buyers.

These loans are a great way to buy property sooner without saving a massive deposit, but they also come with a number of risks and extra costs, including:

  • LMI
  • Higher interest rates
  • Higher repayments
  • Higher interest cost over the life of the loan
  • Difficult application process

Before buyers consider a low-deposit home loan they should be aware of all the risks and drawbacks so that they can be sure they’re making the right decision.

Low deposit home loan pros and cons

Pros

  • May allow you to purchase a home sooner without saving a large deposit. 
  • Buying a property sooner may allow you to benefit from more capital gains if the property you buy jumps up in value. This could increase your equity. 
  • You may be able to switch to a cheaper loan product in future when you increase your equity in the property. 

Cons

  • Higher costs including LMI. 
  • May have higher interest rates.
  • Higher principal amount, which means: Higher repayments, and more interest payable over the life of the loan. 
  • Your application may be more likely to be denied.

Low deposit home loan FAQ

How do low deposit home loans work?

Low deposit home loans work the same as normal home loans, although they may include extra costs like LMI as well as higher interest rates. They may also be harder to secure as lenders deem them to be higher risk.

Are low deposit home loans a good idea?

That depends on your unique situation. Low deposit home loans generally cost more than regular home loans so if you’re able to save a 20% deposit you’ll pay less interest and lower fees over the life of your loan. With that said if you have a reliable, high income, low deposit loans can be a good way to buy property sooner.

Are low deposit home loans expensive?

Low deposit home loans can be more expensive than regular home loans. That’s because they often come with a one-off cost known as lenders mortgage insurance - charged by your lender to protect them against losses if you default on your loan.

Can first-home buyers get low deposit loans?

Yes, first-home buyers can get low deposit home loans. However, lenders will only approve them if you have a solid stable income that can easily service the repayments. They may also come with extra costs like LMI and higher interest rates.

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

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