How a smaller deposit affects your home buying journey

With home prices where they are across Australia, it’s little wonder borrowers are questioning whether they can save for the hefty deposit required. 

But at Mozo we’re here to help you tackle this quandary and one way to do so is to weigh up smaller home loan deposits. 

Firstly, when looking to buy a new home, the deposit portion of your loan-to-value ratio (LVR) is generally expected to be at 20%. If you’ve not heard of it, LVR is basically the property value (e.g. $1,000,000) split between the loan the bank gives you (LVR of 80%) and the deposit that you put down (20%). 

In the $1,000,000 example, you’d be looking at the 20% deposit being worth $200,000 and an 80% LVR of $800,000. Trying to save up for that can seem pretty daunting and might just seem too far out of reach for your average borrower in the capital cities. 

However, while a 20% deposit is generally the standard required by banks, there are low deposit home loans that you can get. So, the question is, how does a smaller deposit affect your home buying journey?

See also: 4 tactics for the first-time homebuyer in this high priced market

With the Australian Bureau of Statistics projecting Australia's population to reach between 37.4 and 49.2 million people by 2066, there’s no guarantee that the housing supply will keep up with growth. That might mean that prices in the capital cities maintain their higher prices and, potentially, they could rise even further.

With so much uncertainty, it’s no wonder that more borrowers are looking to get a deposit down on their homes faster. So, taking into consideration that borrowers are looking to get to their deposit goals faster, how do the numbers work out for a lower deposit? 

Let’s say you have an $800,000 loan. If you were looking to save a 10% deposit ($80,000) and saved $10,000 a year, you’d get there in 8 years. This contrasts with the 20% deposit which would take twice as long at 16 years of saving $10,000 a year. However, while you would be paying a lower initial deposit at 10%, it is important to keep in mind that you’d also be paying higher monthly repayments due to the larger size of your loan.

So, say a higher monthly repayment is manageable for you and you want to get the keys to your new home ASAP.  The thing is, taking out a low deposit isn’t just a case of rocking up to the bank with less than 20% of the total home value. 

If you’re taking out a low deposit, there are a couple of things you may have to abide by:

• Lenders Mortgage Insurance: One factor to consider when applying for a loan with a small initial deposit is Lenders Mortgage Insurance (LMI). With LMI, you’ll have to pay extra as the bank sees you as a riskier borrower to lend to. 
  

• First home owners could benefit more: First home owners not only get access to government grants or concessions in most states and territories, but they also can get access to the federal government's First Home Buyers Guarantee (FHBG). Essentially, the government acts as a guarantor for a home loan with a deposit between 5% and 20% meaning that you wouldn’t pay LMI.
  

• Home Loan Guarantor: A home loan guarantor is a homeowner (usually a parent) who agrees to let you use their property as an asset to secure your loan. This means that, if you default on your loan and the bank needs to recover the cost, the guarantor may have to sell their property to meet that. Much like the FHBG, you can use a home loan guarantor to avoid paying LMI.

Taking out a low deposit loan will mean that your monthly repayments will be larger. This is due to the higher interest rates that lenders usually charge for high LVR borrowers as well as the LMI that you may need to pay. The question is, how does this affect the overall amount that you’ll be paying?

It should be noted that for some, it just isn’t realistic to save up for a 20% deposit, even if it does mean lower cash spent overtime. Also, some borrowers may have life circumstances (such as starting a family) that require them to get a house in a shorter period.

Once your repayments have helped you reach 20% equity of the total property value (or an LVR of 80%), you could find yourself gaining access to some good refinancing opportunities. 

Basically, when you refinance your home loan at this point, the amount of the property you’ve paid for means that you’d be borrowing a lot less money. When refinancing from your low deposit home loan, you can change to a provider who offers a more attractive interest rate as you no longer have the risk associated with a higher LVR due to the lower loan needed.

However, do keep in mind that if you want to refinance from a lower initial deposit, but you’re still not quite at 20% of the properties value, (say, for example, from 5% to 15%) you’ll still have to pay LMI on the newly refinanced loan as it won’t be transferable from the previous mortgage. 

If you’re looking at taking out a small deposit home loan, it’s a good idea to check that you’re getting the best deal possible. One of the best ways of making sure that you’ve got the provider with the best loan available is through comparisons. At Mozo, we have a list of available home loan providers to compare so that you can get the low deposit loan that works for you.