It's no secret that buying a home can be expensive, especially saving up that elusive 20% deposit.
In today's housing market, 20% of the value of even a modest home can equate to hundreds of thousand of dollars. Many property analysts single out the difficulty of saving for a deposit as the biggest hurdle aspiring home buyers have to overcome.
Thankfully, there are alternative pathways to home ownership for those who aren't able to come up with a 20% lump sum. Many lenders offer home loans to borrowers with lower deposits and there are a number of government programs that may be able to help.
What is considered a 'low deposit' home loan?
A loan greater than the standard loan-to-value ratio (LVR) of 80% is generally considered a 'low deposit' home loan.
Such loan products typically require borrowers to also take out lenders mortgage insurance (LMI), an insurance policy to protect the lender should the borrower be unable to pay back their home loan. Although the insurance ultimately benefits the lender, it is the borrower who must pay for it.
Depending on the loan amount, the deposit size, and the insurer, LMI can add tens of thousands of dollars to the cost of buying a home.
See also: Savings.com.au Lenders Mortgage Insurance calculator
There are some lenders on the market who don't levy LMI and others that may waive it under certain circumstances.
See also: Which lenders offer low or no-cost LMI?
But for borrowers facing a hefty LMI charge, there are a number of government initiatives that are definitely worth investigating.
What government programs are there for home buyers with low deposits?
The federal government provides a number of programs to help eligible Australians get into their own homes sooner without having to pay LMI.
The Australian Government 5% Deposit Scheme, administered through Housing Australia, effectively guarantees loans for home buyers with deposits as low as 5% while others require only 2% deposit.
Essentially, applicants must meet eligibility criteria and take out a home loan through a participating lender.
80-95% LVR home loans
But for borrowers who don't qualify for government programs, there are lenders who offer home loans to borrowers with lower deposits, some as low as 5%.
Often, interest rates will be higher than for 80% LVR home loans and many such loans will require the borrower to pay for LMI.
That said, low deposit loans offer a viable pathway into the housing market with the prospect of refinancing to a better loan deal once the borrower builds up equity in the property to help secure a better interest rate.
The table below shows how much would be required for a deposit for a low deposit loan for a $650,000 home.
| LVR | Deposit required | Loan amount |
| 85% | $97,500 | $552,500 |
| 90% | $65,000 | $585,000 |
| 95% | $32,500 | $617,500 |
Savings.com.au's Home Loan Deposit Calculator can give you an idea of how much deposit you would need according to your individual circumstances.
To give you an idea of interest rates, terms, and conditions, the table below features some of the more competitive low deposit home loans on the market.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
6.39% p.a. | 6.42% p.a. | $3,124 | Principal & Interest | Variable | $0 | $845 | 90% | |||||||||||||
6.79% p.a. | 7.16% p.a. | $3,256 | Principal & Interest | Variable | $0 | $450 | 90% | Disclosure | ||||||||||||
7.09% p.a. | 7.09% p.a. | $3,357 | Principal & Interest | Variable | $0 | $160 | 90% | Disclosure |
Pros and cons of low deposit home loans
Buying a home with a low deposit isn't without its drawbacks but there are also upsides to getting into the housing market when the opportunity presents itself.
Let's consider the pros and cons:
Pros | Cons |
Less time taken to save for your deposit It can take several years of hard saving to put aside a 20% deposit for a median priced home. During that time, property prices may rise much faster than your deposit savings. Lower deposit loans allow you to get into the market sooner. | You might need to pay LMI If you aren't eligible for government programs or lender waivers, you'll need to pay for LMI. This can be a considerable cost on top of buying a home. |
First home buyers may be able to avoid LMI If you're a first home buyer that qualifies for government assistance, you can take advantage of schemes and guarantees to avoid paying LMI. | Higher home loan repayments Since you're borrowing more of the home's value and might have lumped the cost of LMI into your home loan, you're likely going to be up for higher monthly repayments. |
Start building up equity When you start paying off your home, you start building up equity. This also occurs organically when the property market sees home values rise. This comes in handy when it comes time to refinance. | Higher interest rate As you're going to be seen as a 'riskier' borrower, you're likely to see this reflected in the interest rate you're offered. Plus, since you have a higher principal, you're going to be charged interest on a larger amount. |
What to consider about low deposit home loans
If you've decided you're ready to take the leap into home ownership, there are ways for you to go about comparing low deposit home loans.
There are many lenders on the market that offer them so it's worth spending some time researching which lender will give you the best deal.
When comparing low deposit home loans, below are some of the main variables you should consider:
Interest rates
As mentioned, you're likely going to be paying a higher interest rate than for similar 80% LVR loans on the market. But with some lenders, the interest rate gap may not be as great. Do your homework and also consider whether a variable or fixed interest rate may best meet your needs as you settle into home ownership.
LVR
Make sure you pay attention to the maximum LVR on the loans you're looking at. If you have a 5% deposit saved up, you need to be looking specifically at 95% LVR home loans. Be sure you're targeting the right loan products for your circumstances.
Loan type
The low deposit home loans listed above are for owner occupiers loans, meaning they're for home owners who intend to live in the property. If you're after an investment property, make sure you're looking at investment loans. The lending criteria can be quite different.
Fees
Most home loans come with fees, many of which are reflected in the loan's comparison rate. Pay attention to what fees you're going to be charged as they can sometimes make what looks like a good deal a mediocre one. A loan with a comparison rate that's considerably higher than it's advertised rate is likely to have some hefty fees attached.
Features
Home loans come with many features. Things like a redraw facility or an offset account can become handy features of your home loan and if you're interested in using them, make sure your home loan includes them.
LMI
Some lenders may want an up front LMI payment while others will allow the charge to be included in the loan amount. This can be helpful if you don't have the ready cash to pay it but means you'll be paying interest on it for the term of the loan. Make sure you understand the options open to you.
Should you take out a low deposit home loan?
Ultimately, whether you choose to take out a low deposit home loan is going to depend on your financial objectives and individual circumstances.
It may be you're concerned the prospect of home ownership is slipping through your fingers as property prices march higher. Perhaps there is a home you just have to buy or an opportunity that comes up before your deposit savings are sufficiently high enough. In these cases, a low deposit home loan can be an option.
You always need to weigh up the costs and benefits for you particular situation. Seeking independent financial advice can help you do this. A mortgage broker may also be able to present you with some options to consider.