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Zero deposit home loans: Can you get one in Australia?

First home buyer celebrates buying with a low deposit home loan.

The sky is blue. Pigs can't fly. And property prices in Australia are expensive. It is known.

But as home values climb, so does the minimum home loan deposit you need to buy in. After all, if the average mortgage size in Australia is over $600,000, then the average 20% deposit would be $120,000. Ouch.

Saving this much can be difficult, especially with the high cost of living. So what other options are there for home buyers? Can you buy with a low deposit home loan? Or better still, a zero deposit home loan? 

Here's what you need to know.

What is a zero deposit home loan?

Woman with a cash gift from her guarantor parents.

A zero deposit home loan (sometimes called a no deposit home loan) is a mortgage that requires no downpayment from the borrower.

Before the Global Financial Crisis (GFC) in 2007 - 2009, some lenders allowed first home buyers to borrow without a deposit.

However, this type of lending is extremely risky because the borrower essentially has no home equity. If their property value falls, they could easily slide into negative equity and owe their lender if they have to sell.

These days, the only way you can apply for a home loan without stumping up for a deposit of your own is if a parent or family member is willing to go guarantor on the mortgage for you.

A guarantor essentially uses their own equity as collateral for your home loan. For example, a parent could use $120,000 from their built in equity as your home loan deposit instead. This means you, the home buyer, essentially buys in without a deposit.

However, a guarantor needs to know that if you're unable to met your mortgage repayments and you default on the home loan, any money the lender can't recover by selling your property can be taken from the portion your guarantor put up as security. 

An alternative option is for your parents to help you with the deposit. For example, you could aim to save 5% yourself and then your parents could gift you the money needed for the remaining 15%, making a 20% deposit in total. And cash gifts in Australia are tax free (except in extremely limited situations), so it's certainly something to think about.

What is a low deposit home loan?

First home buyer flashing finger guns at his home he bought with a low deposit home loan.

Alternatively, some mortgage lenders will allow first home buyers to borrow up to 95% of the value of a property, meaning you only need a 5% deposit.

These are called low deposit home loans because, unsurprisingly, you’ll be borrowing with a deposit under the recommended 20%.

Using the average mortgage size of $600,000 as an example again, instead of needing to save up the not inconsiderable sum of $120,000 for a 20% deposit, you would only need $30,000 for a 5% deposit.

If you’re purchasing your first property as an investor, keep in mind you may not be eligible for a low deposit loan, as many lenders only offer 5% deposit loans to owner occupiers (i.e people who are going to live in the home they buy).

That sounds pretty straightforward, right? Well, yes. And no. There are a few cons of a low deposit home loan you’ll want to take into account, because while a small deposit might be the more convenient option, it may also prove to be more costly. 

Con 1: Lenders Mortgage Insurance (LMI)

Before you take out a low deposit home loan, you’ll need to brace yourself for the cost of Lenders Mortgage Insurance (LMI). This type of insurance policy financially protects the lender in case you default on your home loan repayments.

Most banks and lenders require LMI to be taken out if a borrower’s deposit is below 20%. Small deposit home loans are considered riskier because of (you guessed it) low equity. And low equity means high financial risk for the lender, so they charge you more to cover their bases. 

Low equity = high risk

LMI is not an insignificant sum of money, either. It can cost thousands or even tens of thousands of dollars on top of your mortgage repayments.

LMI is also scaled, so the more you borrow, the higher your insurance cost will be.

To pay LMI, you generally have two options: 

  • Pay upfront.
  • Have the cost capitalised into loan payments (plus interest).

LMI just protects the lender: not you. If you’re looking to safeguard yourself, Mortgage Protection Insurance might be the option you're after.

Con 2: High LVR interest rates

Another factor to consider is that lenders tend to charge a premium on loans with higher loan-to-value ratios (LVRs).

Your LVR breaks down your property cost into loan size and deposit size. Your 20% deposit pays for 20% of the purchase price, and your home loan pays for the remaining 80%. Your LVR is therefore 80%.

Higher LVRs mean more of the property purchase price is covered by the home loan, so these types of home loans are risky. If you buy with a 5% deposit, for example, you have 95% LVR.

Interest rates on high LVR home loans are much higher than interest rates on low LVR home loans. What LVR tier you sit in therefore affects how much you pay in mortgage costs. 

If you look at the table below, even dropping from a 90% LVR loan to an 80% LVR loan saves the borrower over $200 a month and over $50,000 in interest over the loan's lifetime.

LVR tier interest rate costs for the same property (12 January 2024)

Deposit (%)Deposit ($)LVR tierAverage interest rateLoan amountMonthly repaymentsTotal interest
5%
$25k
95%
7.38% p.a.
$475k$3,473$566,965
10%$50k90%7.13% p.a.$450k$3,218$515,377
20%$100k80%6.85% p.a.$400k$2,789$436,687
30%$150k70%6.81% p.a.$350k$2,431$379,440
40%$200k60%6.77% p.a.$300k$2,077$322,957

Calculated for a $500,000 market value property with a 25-year loan term. Averages taken from the Mozo home loan database.

Buying with a larger deposit can lower your LVR and let you access more competitive interest rates. A 40% deposit might be hefty to save for, but it could some with some serious long-term savings.

First home buyer grants for low deposit home loans

Aside from support from parents or family members, another option for Australian home buyers is to make the most of government initiatives such as the First Home Loan Deposit Scheme or the Family Home Guarantee.

Launched by the federal government in 2019, the First Home Loan Deposit Scheme basically helps eligible first home buyers purchase property without having to fork out for lenders mortgage insurance.

It works like this: buyers will need to save a deposit of at least 5%, then the government will guarantee the remaining deposit requirement to the bank (i.e. the remaining 15%).

Alternatively, the Family Home Guarantee, which was rolled out as part of the 2021 Federal Budget, gives single parents the chance to purchase their own homes without needing to pay LMI.

Under the initiative eligible buyers can buy a property with a deposit as low as 2%, with the government guaranteeing the difference to a 20% deposit.

Those are just initiatives targeting borrowers with lower deposits. For more government-run schemes for first home buyers, check out our guides on the First Home Super Saver Scheme and First Home Owner Grant.

Home buying costs to budget for

Aside from the home loan deposit, interest rate costs, and potential Lenders Mortgage Insurance (LMI), what other home buying costs do borrowers need to budget for?

Here are some of the general ones to consider, no matter what type of borrower you are. 

  • Stamp duty: Charged by your state or territory, stamp duty costs can be significant. Unlike lenders mortgage insurance, must be paid upfront. Our stamp duty calculator can show you how much you might need to buy, based on the Australian state, property value, and buyer type.
  • Upfront mortgage fees: Many home loan providers charge upfront fees for processing and organising your mortgage application. These can include application fees, legal fees, settlement fees, and property valuation fees. Altogether, fees can costs hundreds or thousands of dollars.
  • Ongoing fees: On top of paying interest, you may also have to pay a monthly or annual service fee to cover administration costs for your mortgage. Ongoing services fees are particularly common with packaged loans, so you may want to weigh up the benefits involved against the cost of the fee.

Tips for getting your home loan approved

Applying for a low or no deposit home loan? Here are some tips for getting your home loan approved.

1. Check your borrowing power

Now that interest rates are sky high no matter the loan, you’ll want to make sure that you can comfortably service your mortgage. Punch your numbers into our borrowing calculator to see how you fare.

2. Prove your savings credentials

Using a guarantor may mean that you can take out a home loan with zero deposit, but you'll still need to show that you can repay the loan on your own.

Lenders will want to see proof of genuine savings by looking at around three months worth of bank account statements, so one way to ensure you’re always putting away money is by setting up a recurring transfer to your savings account on payday.

3. Clear any debt

As part of the application process, home loan lenders will look over any existing debt you have, whether that's on a credit card, personal loan, or even your HECS-HELP student debt.

Given that outstanding debt could increase your debt-to-income (DTI) ratio and affect your repayments, it may be a wise idea to tackle this before applying for a home loan.

4. Reduce your credit card limit

Even if you don't have an outstanding balance, any credit you can draw down on will be taken into consideration when a lender is assessing you for a home loan. So the lower your credit card limit is, the better.

5. Keep your life consistent

Changing jobs or purchasing an expensive item before applying for a home loan could be a red flag to a lender, so in the months prior to applying for a loan, it can be a good idea to keep things consistent by staying with your current job and avoiding any big purchases.

Compare low deposit home loans in the table below.

Mozo may receive payment if you click the products below. We don’t compare the entire market, but you can search our database of 473 home loans.
Last updated 16 June 2024 Important disclosures and comparison rate warning*
  • Mozo Expert Choice Badge
    Express Home Loan

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    Get fast 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.

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  • Special Real Deal Home Loan

    Owner Occupier, Principal & Interest, LVR 80-95%

    interest rate
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    6.84% p.a. variable
    6.88% p.a.

    No ongoing fees. Ability to split your loan between fixed and variable. Buy your first home and get a $1,000 housewarming gift on loans ≥$250K. LVR ≤95%. Limited time offer. Apply by 6/12/2022, funded by 16/03/2023. T&Cs apply.

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  • First Home Buyer Loan Special

    Owner Occupier, Principal & Interest

    interest rate
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    5.90% p.a. variable
    5.93% p.a.

    A low variable rate loan for home buyers. No establishment or ongoing fees to pay. 100% offset account included. Allows for unlimited repayments, redraws and flexible repayment options.

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  • Variable Rate Loan

    Professional Package, Owner Occupier, Principal & Interest, $500,000 - $1,000,000, 80%-90% LVR

    interest rate
    comparison rate
    Initial monthly repayment
    6.39% p.a. variable
    6.74% p.a.

    Enjoy the flexibility of a variable rate with the AMP Bank Professional Package Home Loan. 100% offset account available. Full transaction access and flexible repayment options. Handy redraw facility. Minimum 20% deposit required. Interest only option available. Prequalify today.

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Evlin DuBose
Evlin DuBose
RG146
Senior Money Writer

Evlin, RG146 Generic Knowledge certified and a UTS Communications graduate, is a leading voice in finance news. As Mozo's go-to writer for RBA and interest rates, her work regularly features in Google's Top Stories and major publications like News.com.au.

Tom Watson
Tom Watson
Finance journalist

Tom has over five years experience as a finance journalist covering everything from property and fintech to consumer banking.

* 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.

^See information about the Mozo Experts Choice Home Loan Awards

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