Guide to low deposit home loans: where do rates sit and what are the risks?

It’s no secret skyrocketing property prices over the past few months have made it harder for first home buyers to save for a deposit - and record low rates of wages growth aren’t helping either. 

But for those still trying to climb the property ladder, one option you might consider is to buy your first home with a smaller deposit. So rather than aiming for the standard 20% of the property value, you may choose to save only 10% before applying for a home loan. 

While low deposit home loans offer easier entry into the market, there are a few downsides. For one, you may be put on a higher interest rate, given that you’re a riskier borrower. And because the bank is also lending you a larger sum, you may have to make higher monthly repayments too.

That said, Mozo data reveals competitive rates are in fact available to borrowers with smaller deposits or higher loan-to-value ratios (LVR).

LVR refers to the portion of the property purchase which you owe the lender - so if you have a 10% deposit, your LVR would be 90%. 

Right now, the lowest variable rate in the Mozo database for LVRs up to 90% sits at just 2.04% (2.05% comparison rate*) for owner occupiers on principal and interest (P&I) repayments. This rate from online lender Tic:Toc remains a top-notch offer even when you compare it with 20% deposit variable home loans in our database, ranking third place overall. 

Mozo’s banking expert, Peter Marshall says there’s a reason some lenders like Tic:Toc are reducing their variable rates for low deposit home buyers. 

“The pursuit of customers does seem to be tempting lenders into slightly more risky borrowing, and that’s partly in response to the huge amount of competition for home buyers at the moment,” he said.

What rates can I get with a 90% LVR home loan? 

If you’re interested in comparing home loan rates at <80% LVR and <90% LVR, the table below is a good place to start. Bear in mind that the percentages on display are based on owner occupier P&I home loans in the Mozo database.

Unsurprisingly, fixed and variable rates for <80% LVR loans are better on average than their <90% LVR counterparts. 

The gap between the fixed rate averages of the two LVR tiers ranges from 6-8 basis points depending on the loan term. Meanwhile, the two variable rate averages have a more significant difference of 20 basis points. 

So what does that actually mean? Let’s paint a scenario. 

Anna and Pete are both first home buyers looking to purchase $970,000 houses - that’s around Melbourne’s median house price, according to Domain’s latest report. Anna has saved up a 20% deposit or $194,000, while Pete has only managed half of that amount (a 10% deposit or $97,000). 

If both Anna and Pete went with the average variable rate for their respective LVR tiers, here’s what their interest costs and monthly repayments might look like: 

• Anna would be borrowing $776,000 at 3.27%. If she’s taking out the home loan over 30 years, she could be looking at $3,386 in monthly repayments and $442,861 in total interest paid over the life of her loan. 
• Pete would be borrowing $873,000 at 3.48%. If he’s also taking out the home loan over 30 years, he could be looking at $3,910 in monthly repayments and $534,751 in total interest paid over the life of his loan. That’s $524 and $91,890 higher than Anna’s, respectively. 
  

To crunch the numbers yourself, visit our home loan repayments calculator.

An extra cost to consider with low deposit loans

If you have a small home deposit, an additional expense you’ll also need to account for is Lenders Mortgage Insurance (LMI). This is insurance to protect the lender if the borrower fails to repay their loan, and usually applies to home buyers with deposits below 20%. 

The bad news is, LMI can add up to tens of thousands of dollars. But there are ways to avoid or minimise the cost as a low deposit borrower: 

• Guarantors: The most common tactic is to find someone who can guarantee your home loan; that is, they would be responsible for paying off your mortgage if you fail to. Usually your parent or a close family member can act as your guarantor (although there are risks involved for them). Otherwise you could also apply for a government guarantee under the First Home Loan Deposit Scheme, available for deposits as low as 5%. 
• LMI waiver for certain professions: If you’re a doctor, a lawyer or even a chartered accountant, you may be eligible for a LMI waiver. That’s because lenders see these high-income professionals as lower risk than other borrowers, so they have peace of mind that the loan can be repaid even if the deposit is smaller. 
• Lender initiatives: There is an emerging trend these days of lenders offering extra incentives to bring first home buyers on board, and that includes features to help lighten their LMI burden. For instance, customer-owned lender Gateway Bank recently introduced a solution that allows borrowers to pay their LMI premium in monthly installments instead of as an upfront lump sum. Online lender UBank also announced it would waive LMI for home buyers with a 15% deposit. 

Am I eligible for a 10% deposit home loan? 

Chances are your lender may be more strict with your home loan application if your deposit is less than 20%. So to help boost your chances of getting approved, here’s a checklist of things you should have: 

• Stable income: It may not be a good idea to change jobs if you’re on the verge of buying a home, as lenders generally want to see that you’ve been in your current role for some time. If you’re working in a full-time role, you may need to demonstrate that you’ve been employed there for at least six months. Or if you’re self-employed, you may need proof that you’ve had consistent work over the past two years. This gives the lender assurance that you’ll continue to have steady income to help you repay your home loan every month. 
• Positive credit history: Do you always pay all your bills on time, whether it’s your rent or your credit card? And do you rarely apply for credit products? If you’ve said yes to both, then congratulations, you’ve most likely ticked off this box. Lenders want to see that the borrower has a good credit score and minimal debts, as it shows they’re responsible with their money. But if you have reason to believe your credit record isn’t up to scratch, there are steps you can take to improve your credit score. 
• Genuine savings: Most lenders have this as a mandatory requirement especially if you’re borrowing 90% of the property value or more. The rule-of-thumb is that 5% or more of your home deposit should be genuine savings. This refers to money you’ve parked inside your bank or savings account for at least three months, so any cash gifts, tax refunds or grants like First Home Owners Grant (FHOG) that you have just received won’t count (unless you have held onto them for at least three months).

For more information on how to land your first property, read our first home buyers guide. Or if you’re ready to compare home loan offers and snag a competitive rate, get started with our low deposit home loans comparison tool.