Low Deposit Home Loans

Yes, there are plenty of lenders that allow borrowers to take out home loans with a deposit as low as 5% (so a 95% loan-to-value ratio). A quick look in the Mozo database shows that low deposit borrowers will be able to pick and choose between a variety of big banks, credit unions and online lenders, though the interest rates on offer vary greatly. 

The federal government’s First Home Loan Deposit Scheme (FHLDS) is still up and running for first home buyers with low deposits (at least, as of June 2021). 

In short, the initiative allows first home buyers with a deposit between 5% and 20% to take out a home loan to purchase a new or existing property without needing lenders' mortgage insurance. Instead, the government acts as a guarantor for the loan. 

Loan-to-value ratio (LVR) is an important term to get to grips with in the world of home loans, particularly if you're planning on taking out a low deposit home loan. That’s because LVR is one of the key metrics used by lenders to determine how ‘risky’ you are as a borrower - the lower your deposit is, the higher your LVR will be, and the riskier you’ll be to lenders.  

Typically, lenders will also charge higher interest rates to borrowers with greater LVRs, but the good news is that as you pay off your loan and lower your LVR, you may be able to switch to a better rate.

There are so many types of home loans available to borrowers these days that you can really cherry pick the features that will best suit you.

Interest rates on low deposit home loans are generally slightly higher and you may find that the borrowing limits are also lower on these loans so before you start property hunting it is a good idea to get an idea of the maximum loan amount available if you do have a smaller deposit.

Other features worth reviewing include:

offset account feature. Having an offset account attached to your home loan can save you a lot of money in interest over the life of your loan. Think of an offset as a bank account and the balance in that account is offset against your loan amount. So say you have $3000 in your offset bank account but you owe $500,000 on your home loan. Instead of paying interest on the full loan amount you will only pay interest on $497,000. This may not seem like a lot but over 25 years this adds up.

extra repayments. Having the ability to make extra repayments will also reduce the interest and the length of your loan term. Lump sums you get from work bonus or at tax time can make a difference but so too will putting an extra $50 each month onto your home loan.

You could be up for the following fees depending on your loan choice:

Application fee. This is a fee payable when you apply for a home loan for the lender to assess and process your application. Some lenders waive this fee if you proceed through to settlement.

Valuation fee. You could be charged a valuation fee by the lender for them to value your property. It is important to understand that their valuation may be different to the price you paid for the property or the price given to you by a real estate agent. The lender will base their loan amount off the valuation done by their valuer.

Settlement fee. This is a nominal charge for a bank or lender representative to attend settlement on your behalf and file paperwork.

Service fee. Some loans will have a monthly or an annual service fee. It is important to review this carefully, a $10 a month fee might not sound like much but over a 25 year home loan this adds up to a cool $3000.

Discharge fee. This is a fee payable at the end of the loan term.

In addition to the fees charged by the lender, you may have to pay state or government fees and charges.

Stamp duty calculator. See here if you’ll need to pay stamp duty on your property purchase.

Check out the table above to find the right low deposit home loan for you.

While a low deposit home loan may help you get into the property market or your dream home sooner, they’re not without their drawbacks - namely, higher rates and lenders’ mortgage insurance. These are costs you’ll likely need to factor into your budget, so you may want to weigh them up against saving up for a 20% deposit instead. 

While it’s still possible to secure a competitive rate with a low deposit home loan, lenders do tend to charge a premium for mortgages with LVR’s over 80%. And at the end of the day, a higher interest rate will only add to the amount of interest you pay over time.  

As we’ve explained above, LMI is the other main drawback buyers will need to be wary of when contemplating taking out a low deposit home loan. It’s a cost that generally can’t be avoided, and one that can run into the thousands or tens of thousands of dollars.