Low-deposit home loans are designed to get you into your new home sooner than you’ve imagined by allowing you to purchase a home with a deposit as low as 2% of the property value. The power of homeownership is then in your hands.
Let’s delve into how you can acquire your property sooner using a low-deposit home loan.
How Do Low-Deposit Loans Work?
Since borrowers provide a lower deposit with this type of loan, they will have a higher Loan-To-Value Ratio (LVR). This means lenders might require them to pay Lenders Mortgage Insurance (LMI). The LMI protects the lender in case the borrower defaults on the loan.
Once you’re approved for a low-deposit home loan, you can enjoy relatively the same interest rates as someone who has a 20% deposit. This means depsite having a smaller deposit, you won’t be penalised with a higher interest rate.
| Details | Low-Deposit Home Loan | Traditional Home Loan |
|---|---|---|
| Required Deposit | 5% | 20% |
| Lenders Mortgage Insurance (LMI) | Yes | No |
| Time To Homeownership | Quicker entry into the property market | Longer savings period required |
How Large A Deposit Do I Need?
You might need at least 5% of the property value, which is the minimum that most lenders accept.
We have lenders on our panel that allow you to borrow over 90% of the property value. So, you can qualify for a home loan even if you have a:
Government Help For Low-Deposit Borrowers
Besides lenders offering their low-deposit home loan products, there are several federal government schemes and grants that can help you buy your home sooner.
- The Home Guarantee Scheme involvess a guarantor scheme where the government guaranteeings loans so eligible home buyers avoid paying Lenders Mortgage Insurance (LMI), even with a deposit as low as 2% of the property value. There are three different schemes as part of the Home Guarantee Scheme:
- The Help to Buy Scheme is a shared- equity scheme wherein the government helps first-home buyers purchase a home by contributing up to 40% of the property price for a new home and up to 30% for an existing one.
Give us a call on 1300 889 743 or fill in our free online enquiry form to find out if we can help you get you approved.
How Do I Qualify?
Most lenders have quite strict lending criteria for borrowers with small deposits but, generally speaking, if you can meet the following requirements, you’ll have a good chance of getting approved even if you may have a deposit as low as 3%.
- A good income: The lender will consider your income carefully because it forms the basis of their assessment of your capacity to make mortgage repayments, otherwise known as your serviceability.
- Loan purpose: If you need the home loan for any other reason than to purchase, refinance or build an owner occupied or investment property, such as debt consolidation, then this may be considered depending on the strength of your application.
- Property: Check out this accurate list of restrictions on property types and locations for a low deposit home loan, such as mining towns, high rise units and display homes.
- Clean credit file: There should be no bad marks in your credit history such as late payments on personal loans, credit cards or rent. However, some lenders are less strict if you have at least 10% or more as a deposit.
- Genuine savings usually required: No matter the size of your deposit, most banks will not even consider your low-deposit home loan application unless you have at least 5% of the purchase price in savings that you’ve accumulated over a period of at least three months. The great news is that this so-called “genuine savings” rule isn’t a requirement for all lenders if you can meet certain criteria.
- Reasonable asset position: Your age and income should reflect a relatively high level of assets such as you owning a car, jewelery, having a savings and so on.
- Reliable, long term job: Lenders generally like to see that you’re working full-time (although there are exceptions to this) with an employment history of at least five months in your current role or two years in the same line of work.
- Low level of debt: Although you’ll need a good credit file, the general rule for borrowing at a high LVR is ensuring that any unsecured you have such as a personal loan or a credit card, doesn’t exceed more than 5% of the purchase price of the property. Depending on the lender and your deposit though, showing a history of perfect repayments on these debts can work in your favour.
Obviously, the bigger your deposit, the more our mortgage brokers can leverage when negotiating an approval. On top of that, you’ll have a greater number of lenders available to you.
Can I Get An Interest Rate Discount?
Did you know that we have a special arrangement from one of our lenders for borrowers with a 10% deposit?
There is a 1.20% to 2.37% discount available for all loans over $500,000. Conditions apply so please read more on the 90% home loan page.
There’s even better news if you only have a 5% deposit: you can get the same deal! Again, there are certain requirements and limits, so please read the 95% home loan page.
If you only have a 3% deposit or less, our brokers have considerably less negotiating power and the sole focus for us will be trying to get you approved.
With a 15% deposit or more, our mortgage brokers have a lot more negotiating power.
Discover if you’re eligible for an interest rate discount by completing our free assessment form.
FAQs: Low-Deposit Home Loans
Genuine savings is a requirement that most lenders have but what is it exactly?
Well, in most cases, you’ll need to have more than 5% of the property value to qualify for a mortgage and it must be in following forms:
- Regular deposits into a savings account over a 3 month period.
- Term deposits held for 3 months.
- Shares or managed funds held for 3 months.
- Some lenders will accept equity in another property.
- In some cases, you can use rent as genuine savings.
Despite this, it really depends on how big your deposit is. As a rough guide:
- 15-19% deposit: Genuine savings isn’t required by most lenders.
- 10-15% deposit: Most lenders require genuine savings.
- 3-5% deposit: Almost all lenders require genuine savings.
A 3% or 97% home loan allows you to borrow up to 95% of the property value plus the cost of Lenders Mortgage Insurance (LMI), a one off fee charged when borrowing more than 80%.
LMI roughly works out to be around 2% of the total property value but to get a more accurate figure, use this easy LMI calculator.
By adding or “capitalising” this amount to your home loan, you can actually avoid paying thousands of dollars in LMI upfront and it pay it off with your mortgage repayments at no interest.
Yes, there are. If your parents own property in Australia, then a guarantor home loan might be the best no-deposit home loan option.With a guarantor home loan:
- You don’t need any savings
- You can borrow 100% plus some more money to cover the cost of stamp duty and or other costs associated with buying a home.
- You save thousands of dollars in LMI.
It’s a good question to ask and one that many would-be borrowers carefully consider.
Granted, with a 20% deposit you can avoid LMI completely and you have much more negotiating power in getting a great deal on your home loan.
However, the longer you spend trying to save, the more property prices will increase. Unless you can put away huge amounts every pay day, for ordinary Australians, it’s like chasing your own tail: you don’t get anywhere.
There are low-deposit home loans available! It wouldn’t hurt to speak with a mortgage broker about which solution would work best for you so you can bite the bullet and get into the property market sooner, rather than later.
When comparing mortgages from different lenders, most people just compare interest rates and maybe what kind of features might help them better manage their home loan.
What most borrowers don’t compare are LMI premium rates and it’s not from laziness. The reason is actually ignorance because, the fact is, lenders don’t advertise these rates to the public!
Apart from differences in the rates themselves, each lender also has different loan brackets and rates actually differ depending on whether you’re providing full documents for your home loan application or you need a low-doc home loan.
Despite the differences, the more you borrow, the more your LMI premium will increase.
Check out the LMI rates table and try the LMI calculator to get an idea of the lowest premium you may qualify for with one of the lenders on our panel.
In most cases, you’ll enjoy the same home loan features as someone with an 80% LVR home loan.
This includes features like a 100% offset, fixed interest rates, basic loans and professional packages.
Does it matter whether I have a 3%, 5%, 10% or a 15% deposit?
No, you’ll still enjoy the same features but bear in mind that with only a 5% deposit or less, line of credit and interest-only terms aren’t normally available.
Your LVR is the amount that you’re borrowing represented as a percentage of the value of the property that you’re purchasing. For example, if you borrow $570,000 to purchase a property valued at $600,000, the LVR of your home loan would be 95%.
You can work out your LVR with this calculator but the important thing to remember is that with most banks, borrowing more than 80% LVR is considered a high risk.
Let’s go through the pros and cons of low-deposit home loans to find out if they are worth it.
The pros are”
- You enter the property market sooner instead of waiting for years to save for a deposit.
- You escape the rent cycle and transform from being a renter to a homeowner.
- There are a range of low-deposit home loan options that suit your financial situation. You can choose the loan terms and repayment schedules that align with your future goals.
- The earlier you enter the property market, the more time your investment has to grow. If the value of your property appreciates, you can access your equity.
- Contrary to common misconceptions, low-deposit home loans can come with competitive interest rates. Lenders understand the demand for these loans and offer attractive rates to make homeownership more affordable.
The cons are:
- When you borrow with a low deposit, you often need to pay Lenders Mortgage Insurance. This additional cost can add thousands to your upfront expenses.
- A low deposit means you’ll have a higher Loan-to-Value Ratio (LVR). Some lenders might impose restrictions or have fewer loan options for borrowers with higher LVRs.
- With a smaller deposit, you’ll have less equity in your property initially. This could limit your options if you want to access equity for things like renovations or investments in the future.
- If the property market experiences a downturn, homes bought with lower deposits could be more susceptible to negative equity, where the property’s value is less than the remaining loan amount.
- Lenders might have stricter criteria for low- deposit loans, including more thorough assessments of your financial stability and creditworthiness.
No, not always.
Although the size of your deposit does have some impact on the interest rate you may be eligible for, it really comes down to your overall situation.
For example, if you only have a 5% deposit but you have a stable job, enjoy a good income and have a good asset position, then this can work in your favour when your mortgage broker is negotiating your deal.
Yes, you can. There are actually a few things you can do.
- To avoid LMI completely, you could organise a guarantor to secure your mortgage with their property. In most cases, this would be your parents’ home and it would allow you to borrow 100% of the purchase plus the costs of completing the purchase, no LMI or genuine savings required.
- If you’re an eligible professional, such as a doctor or a vet, and you have a 10% deposit on the other hand, you may also qualify for waived LMI or at least a reduced premium. This can save you literally thousands off your home loan.
- If you’re not an eligible professional but you can save a little more and bring your deposit to 15%, then two of our lenders have an exclusive LMI waiver.
Please complete our free free assessment form to discover if you’re eligible.
Choosing The Right Lender Matters
The lender you go with can make or break your application but it can also mean the difference between you getting a great deal or just going with what the bank offers you as a low deposit borrower.
There can be massive differences in what banks offer you, as far as interest rates, discounts, terms such as waived LMI and more.
A mortgage broker with credit expertise and existing relationships with a number of lenders can give you the negotiating power you need to get the most value out of your mortgage.
Apply For A Low-Deposit Home Loan Today!
Speak with one of our low doc home loan specialists by calling 1300 889 743 or by completing our free assessment form today!
