Buyers urged to consider 'riskier' mortgage costs before bounding into booming market

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Whichever way you slice it, the Australian property market has been booming. 

Home value growth recently hit a 17-year annual high, while lending figures from the Australian Bureau of Statistics continue to show the high demand for new home loans - borrowers took out $32.1 billion worth of loans in June alone. 

And despite a recent drop off, first home buyers are still entering the market in numbers not seen in over a decade. 

Given the skyrocketing prices, it’s understandable that many new or first-time buyers will have been struck by the idea of FOMO (fear of missing out). But would-be buyers looking to get into the market faster have been urged to make sure they’re aware of the extra costs that may be involved with ‘riskier’ mortgage options.  

“If you’re trying to break into the booming home loan market with a small deposit, family guarantee or longer loan term, it’s important to know what you’re getting into and understand the risk you’re taking,” says Mozo spokesperson, Tom Godfrey.

So with that in mind, we’ve crunched some of the potential costs involved when opting for a ‘riskier’ mortgage. 

Purchasing sooner with a lower deposit

In the industry a ‘standard’ deposit is considered to be 20% of a property’s value, but plenty of lenders allow borrowers to take out home loans with deposits as low as 5%. And while it may be tempting to purchase a property faster with a smaller deposit, lower deposit home loans aren’t without their additional costs. 

One of these can come in the form of higher interest rates that lenders typically charge borrowers on mortgages with higher loan-to-value ratios (ie. those with lower deposits). 

For example, comparing the average variable rates in the Mozo database at different LVR tiers revealed that on a $400,000 loan, an owner occupier borrower with an LVR of 95% would pay $1,807 in monthly repayments compared to $1,725/month with an 80% LVR. 

Aside from rate premiums, one almost inescapable cost for home buyers with a deposit under 20% is lenders mortgage insurance (LMI). 

And LMI isn’t cheap. Typically it will be an additional cost in the thousands or tens of thousands of dollars that borrowers will be required to pay, although buyers eligible for the First Home Loan Deposit Scheme (FHLDS) will be able to avoid it. 

“While it might be tempting to leap on to the housing ladder with a small deposit while the market is booming, it’s important to understand the additional costs such as LMI,” says Godfrey.

“LMI was introduced in Australia in 1965 to help lenders work with borrowers who have smaller deposits. The smaller deposit you have the more risk the lender takes on so they charge you a one-off fee which helps cover their costs if you were to default on your loan.” 

Stretching out your home loan 

Typically, home loans tend to be taken out over 25 or 30 years. So while there’s nothing unusual about a 30-year home loan term, stretching out a home loan over a longer term is likely to end up costing borrowers more.  

For example, a mortgage holder with a $400,000 loan and a variable rate of 3.24% would pay $41,761 less interest if they paid their loan off over 25 years rather than 30 years.

“Extending your loan by five years or pulling back on paying down the principal loan amount might give you short term respite from bigger monthly repayments but long term it can be a financial trap,” says Godfrey.

On the subject of time, Godfrey also highlights the need for borrowers to prepare for the possibility of rate rises over the period of the loan term, saying: “It’s important to stress test your ability to make repayments on a bigger loan amount to prepare for future interest rate increases.”

Currently home loan rates are at the lowest levels they’ve been in years, but there’s no guarantee that they remain this low. In fact, ANZ, CBA and Westpac have all forecasted that the Reserve Bank will begin to lift rates in the next few years. 

Getting family to guarantee your loan

While the Bank of Mum and Dad continues to be one of the nation's largest mortgage lenders and one of the only ways for many Australians to be able to purchase property, getting a family member to go guarantor on a home loan isn’t without its risks - and they’re not just financial. 

According to ASIC’s Moneysmart, guarantors should be aware that their own home could be at risk if the loan is defaulted on, it could affect their credit report and, if things go sour, it could damage family relationships.  

Ultimately, whether it’s borrowing with a lower deposit or getting a family member to guarantee a loan, Godfrey urges prospective buyers to take the time to weigh up the costs and risks involved with taking out a mortgage. 

“Despite the economic uncertainty, it’s clear Australians' love affair with property is continuing. But it’s important to remember, taking out a home loan should be a financial decision, not an emotional one.” 

“If you’re trying to enter the property market your best option is always to save a decent deposit, buy a property you can afford and get the best home loan rate possible.”

RELATED: Lenders cut variable rates to record-breaking lows

Ready to start the search for your first property? Get the know-how you need by heading over to our dedicated first time buyer hub where we’ve got guides and tips on everything from the home buying process to the latest government schemes and incentives available to Australian first home buyers.

Home loan comparisons on Mozo

Mozo may receive payment if you click the products below. We don’t compare the entire market, but you can search our database of 472 home loans using the filters below.
Last updated 13 July 2024 Important disclosures and comparison rate warning*
  • Basic Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.16 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Enjoy a low rate home loan with $0 application fee and $0 ongoing fees. Flexibility to split your loan and set different repayment types. Fee free redraw from your loan using online banking. Flexible ways to repay. 40% Deposit required.

  • Unloan Variable

    • Owner Occupier
    • LVR <80%
    Interest rate
    5.99 % p.a.
    Variable
    Comparison rate
    5.90 % p.a.
    Initial monthly repayment
    $2,995
    Go to site

    Built by CommBank, the Unloan is the first home loan with an increasing discount (conditions apply) for borrowers. No application or banking fees. No monthly account keeping or early exit fees. Apply online in minutes.

  • Offset Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.39 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Ability to open up to 10 offset accounts per loan account. Fast online application. Linked Debit Mastercard® with fee-free access at ATMs across Australia. Package a credit card with your home loan and the annual card fee will be waived (T&Cs apply). 40% deposit required.

  • Special Real Deal Home Loan

    • Owner Occupier
    • Principal & Interest
    • LVR <80%
    Interest rate
    6.19 % p.a.
    Variable
    Comparison rate
    6.23 % p.a.
    Initial monthly repayment
    $3,059
    Go to site

    No application or service fees. Flexibility to choose your repayment schedule (weekly, fortnightly or monthly). Use multiple Everyday Accounts with 100% interest offset to pay your home loan off sooner.

  • Optimum Fixed Rate Home Loan

    • Owner Occupier
    • Principal & Interest
    Interest rate
    5.69 % p.a.
    Fixed 3 years
    Comparison rate
    6.34 % p.a.
    Initial monthly repayment
    $2,899
    Go to site

    Lock in a competitive interest rate and enjoy peace of mind for the fixed period. Available for owner occupied new and refinanced home loans with at least 20% deposit. Split option available as well as offset and redraw. Noapplication, ongoing or banking fees. Third Party fees may be applicable - payable within loan repayments. Extra repayments up to $20K per annum permitted. Apply online, 100% member owned credit union.

  • Unloan Variable

    • Owner Occupier
    • LVR <80%
    Interest rate
    5.99 % p.a.
    Variable
    Comparison rate
    5.90 % p.a.
    Initial monthly repayment
    $2,995
    Go to site

    Built by CommBank, the Unloan is the first home loan with an increasing discount (conditions apply) for borrowers. No application or banking fees. No monthly account keeping or early exit fees. Apply online in minutes.

  • Express Home Loan

    • Owner Occupier
    • Principal & Interest
    • LVR <90%
    Interest rate
    6.01 % p.a.
    Variable
    Comparison rate
    6.14 % p.a.
    Initial monthly repayment
    $3,001
    Go to site

    Get online approval from the award-winning Bendigo Bank Express Home Loan. Multiple offset accounts and redraw available. 100% offset on variable rate loans and partial offset on fixed rate. Flexible repayment options. New home loans only.

  • Fixed Rate Loan

    • Owner Occupier
    • Principal & Interest
    • LVR <80%
    Interest rate
    6.09 % p.a.
    Fixed 3 years
    Comparison rate
    6.15 % p.a.
    Initial monthly repayment
    $3,027

    Additional repayments of up to $10K per fixed year. Interest rate discounts available. Waiver of $499 application fee when combined with an Orange Advantage Home Loan.

  • Basic Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.16 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Enjoy a low rate home loan with $0 application fee and $0 ongoing fees. Flexibility to split your loan and set different repayment types. Fee free redraw from your loan using online banking. Flexible ways to repay. 40% Deposit required.

  • Mortgage Simplifier

    • LVR<80%
    • Owner Occupier
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.17 % p.a.
    Initial monthly repayment
    $3,043

    Get a competitive variable rate with ING’s Mortgage Simplifier. Free extra repayments, no monthly or annual fees. Freedom to make free extra repayments or redraws.

  • Offset Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.39 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Ability to open up to 10 offset accounts per loan account. Fast online application. Linked Debit Mastercard® with fee-free access at ATMs across Australia. Package a credit card with your home loan and the annual card fee will be waived (T&Cs apply). 40% deposit required.

  • Special Real Deal Home Loan

    • Owner Occupier
    • Principal & Interest
    • LVR <80%
    Interest rate
    6.19 % p.a.
    Variable
    Comparison rate
    6.23 % p.a.
    Initial monthly repayment
    $3,059
    Go to site

    No application or service fees. Flexibility to choose your repayment schedule (weekly, fortnightly or monthly). Use multiple Everyday Accounts with 100% interest offset to pay your home loan off sooner.

  • Basic Home Loan

    • Fixed
    • Owner Occupier
    • Principal & Interest
    • LVR<70%
    Interest rate
    6.25 % p.a.
    Fixed 3 years
    Comparison rate
    6.20 % p.a.
    Initial monthly repayment
    $3,079
    Go to site

    No upfront or ongoing fees. Free extra repayments and redraw facility. Option to earn Qantas points. Min 30% deposit required. Borrow up to $750,000.

  • Offset Home Loan

    • Fixed
    • Owner Occupier
    • Principal & Interest
    • LVR <70%
    Interest rate
    6.25 % p.a.
    Fixed 3 years
    Comparison rate
    6.42 % p.a.
    Initial monthly repayment
    $3,079
    Go to site

  • Fixed Rate

    • Owner Occupier
    • Principal & Interest
    • <80% LVR
    Interest rate
    6.59 % p.a.
    Fixed 3 years
    Comparison rate
    7.06 % p.a.
    Initial monthly repayment
    $3,190

    Enjoy up to $3000 cashback for eligible first home buyers and $2000 cashback for refinancers on eligible home loans with the ANZ Fixed Rate Home Loan. Get the security of repayment certainty with a competitive locked in rate. No ongoing fees to pay. Offset account on 1-year fixed loans ($10/month fee applies). Interest-only payments allowed.

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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