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What is a low deposit home loan?

The standard for home loan deposits in Australia is 20% of the property’s purchase value, but for those struggling to save for their first deposit, it’s possible to opt for a low deposit home loan.

With a low deposit home loan you only pay around 5-10% of the property’s value, instead of the typical 20% deposit.

Low deposit home loans have some drawbacks, including higher interest rates, stricter lending criteria and the added expense of lenders mortgage insurance (LMI) in some cases.

The upside of a low deposit home loan is that it gets you on the property ladder sooner, which may be particularly helpful for first home buyers, or anyone looking to get ahead of potentially rising property prices.

Understand loan-to-value ratio

A low deposit home loan means you’ll have a high loan-to-value ratio (LVR). Your LVR refers to the amount of money you need to borrow in proportion to the property’s value.

Lenders typically want you to have a home deposit of at least 20%, which gives you a loan-to-value ratio of 80%. If your LVR is more than 80%, it’s likely you’ll be deemed a riskier borrower and may need to pay a higher interest rate.

This is important to keep in mind with low deposit home loans – if you’re taking out a mortgage with an LVR of more than 80%, you might pay more interest in the long run. You may also need to pay lenders mortgage insurance.

Will I have to pay lenders mortgage insurance?

Low deposit home loans of under 20% generally require you to pay lenders mortgage insurance.

It’s a type of insurance that protects the lender if you’re no longer able to meet your home loan repayments, but it’s a cost the lender passes on to you.

The cost of LMI will depend on the amount you’re borrowing and your LVR.

There are ways to avoid paying lenders mortgage insurance, such as government home loan grants that can waive the cost of LMI you’d typically have to pay, even if you have a deposit as small as 5%.

Other ways to avoid paying lenders mortgage insurance include asking a family member about going guarantor on your home loan or using a substantial cash gift.

Lenders mortgage insurance can be paid in a one-off instalment, but it’s often lumped into the overall cost of your home loan so you pay it off over time. While this spreads out the cost over time, it means it will also accrue interest.

LMI doesn’t protect you if you can’t meet your mortgage repayments, so you would need to take out income protection or mortgage protection insurance to cover you in case of illness. injury or redundancy.

Government support for low deposit home loans

A low deposit home loan can be a helpful way of getting into the property market, but higher interest rates and LMI are added expenses that can be a deterrent.

However, if you’re a first home buyer in Australia, you may be eligible for First Home Owner Grants (FHOGs) or other first home buyer schemes.

With the First Home Guarantee, for example, the Australian government acts as your guarantor. This means the government provides additional security by adding to your home loan deposit.

Keep in mind that the government’s home loan schemes are kept to participating lenders, so you’ll need to check that your mortgage provider is participating. Income limits also apply and not everybody is eligible.

How can I calculate my home loan repayments?

You can estimate your repayments with Mozo’s free home loan repayments calculator.

Just plug in your loan amount and term and our calculator will instantly tell you what your monthly repayments will be so that you can begin budgeting.

Applying for a low deposit home loan

The application process for a low deposit home loan can involve a fair amount of preparation. Generally, you should check you have your documentation in order, such as:

• Identification (driver’s licence, passport)
• Proof of income
• Liabilities (such as debts)
• Credit score

It’s a good idea to do your research for the loan you’re looking to get, as there are other costs associated with a home loan such as stamp duty and legal fees.