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What is a low deposit home loan?
A low-deposit home loan is a mortgage that only requires a 5-10% deposit instead of the typical 20% of the property’s value most lenders require. For many buyers, a low deposit home loan may be their only option to buy property. Commonly, first-home buyers, low-income earners, single parents and self-employed individuals.
For example, it would allow you to buy a $600,000 home with a deposit of just $30,000 (5% of the property’s value) instead of $120,000 (20% of the property’s value).
Buying a home with less than a 20% deposit will result in a loan-to-value ratio (LVR) above 80%. Lenders consider home loans with an LVR above 80% riskier and charge LMI to offset that risk, along with a higher interest rate.
You can avoid LMI on a home loan with a low deposit if you:
Home Guarantee Scheme (HGS)
Apply via the government’s Home Guarantee Scheme (HGS) with a participating lender. There’s an income threshold of $125,000 for single applicants and $200,000 for joint applicants.
Guarantor
Have a guarantor who can contribute a portion of their home equity in addition to your cash deposit. This can be a parent or family member.
How your deposit determines your LVR
The size of your deposit determines your LVR. The larger your deposit, the lower your LVR and vice versa. LVR is your loan amount as a percentage of your property's value.
For example, if you have a $120,000 deposit to buy a $600,000 property, you’d need to borrow $480,000 from the bank.
Your LVR is calculated by dividing your loan amount by the property's value:
- ($480,000 loan ÷ $600,000 property value) x 100 = your LVR is 80%.
- In other words, you’re borrowing 80% of the property’s value.
What’s the LVR on a low deposit home loan?
A low deposit mortgage can have an LVR of up to 90-95%. In other words, it allows you to borrow up to 90-95% of the property’s value. But, you may pay LMI which is generally included in your loan amount. In this case, interest will be charged on the cost of the LMI.
How much is LMI on a low deposit home loan?
Property value | |
Home loan with standard 80% LVR | $600,000 |
Low deposit home loan with 90% LVR | $600,000 |
Low deposit home loan with 95% LVR | $600,000 |
Deposit amount | |
Home loan with standard 80% LVR | $120,000 (20%) |
Low deposit home loan with 90% LVR | $60,000 (10%) |
Low deposit home loan with 95% LVR | $30,000 (5%) |
Loan amount | |
Home loan with standard 80% LVR | $480,000 |
Low deposit home loan with 90% LVR | $540,000 |
Low deposit home loan with 95% LVR | $570,000 |
LMI cost | |
Home loan with standard 80% LVR | $0 |
Low deposit home loan with 90% LVR | $20,351 |
Low deposit home loan with 95% LVR | $25,015 |
| Home loan with standard 80% LVR | Low deposit home loan with 90% LVR | Low deposit home loan with 95% LVR | |
|---|---|---|---|
Property value | $600,000 | $600,000 | $600,000 |
Deposit amount | $120,000 (20%) | $60,000 (10%) | $30,000 (5%) |
Loan amount | $480,000 | $540,000 | $570,000 |
LMI cost | $0 | $20,351 | $25,015 |
LMI vs large deposit – Which is better?
Many first-home buyers wonder whether buying a home with a low deposit and paying LMI is preferable to delaying their purchase for a few more years until they've saved up a larger deposit. There is no right or wrong answer.
A low deposit home loan can help you buy a property sooner, but generally has higher long-term costs compared to a loan with a 20% deposit. That's because you will have:
A larger loan amount
generally with a higher interest rate (until you’re able to refinance to a lower rate)
LMI capitalised
into the loan (if applicable) which you’ll also pay interest on.
If you want to buy a home now in case property prices keep rising, you might find the additional costs worth it. Speak to your mortgage broker about strategies to minimise these costs over time (e.g. use an offset account to reduce your payable interest). The main advantage of buying a home sooner is that you can build equity and benefit from capital growth sooner.
How to apply for a low deposit home loan
1. Check your eligibility for a low deposit mortgage
The minimum eligibility criteria to apply for a low deposit home loan with most lenders include:
- Australian citizenship or permanent residency (or you must apply with an Australian citizen or permanent resident)
- You must be over 18 years of age
- Meet the lender’s minimum income requirements
- Have at least a 5% deposit (which you can show you’ve accrued over time)
- A good credit score
2. Complete the lender’s home loan application form
You can apply for a low deposit home loan online via your lender’s website. Alternatively, your mortgage broker can handle the application on your behalf from start to finish.
You’ll need to notify your lender or mortgage broker if you plan to apply via the Home Guarantee Scheme, or if you have a guarantor as this will require additional documentation.
3. Get approved for a low deposit home loan
The lender will conduct a credit check and may grant you pre-approval. This is when a lender agrees in principle to lend you a specified amount. Once you make a formal offer on a home, the lender will order a property valuation, and you can receive unconditional approval.
You’ll receive a loan offer letter outlining the terms and conditions, including the interest rate. Sign the offer if you agree to the terms and send it back to the lender to seal the deal.