Low deposit home loans

How low deposit home loans work

A 20% deposit is the standard when buying property in Australia. But that's a tall order, especially in cities where house prices have risen so fast.

This is why many people choose low deposit home loans, which only require 10% deposits or even 5% deposits. Low deposit home loans let borrowers buy homes faster, without having to save big deposits.

But there is a catch. When your deposit falls below 20%, lenders charge you something called a lenders mortgage insurance (LMI) premium. This can add thousands of dollars to your property buying costs.

Is a low deposit home loan the right option for you?

Given how hard it is to save a 20% deposit, many buyers still go for low deposit loans even with the LMI cost added on. Let's break down the costs and challenges of getting a low deposit loan.

The benefits

Low deposit home loans allow you to buy a property faster. If you're buying a property for $500,000, a 20% deposit is $100,000. A 5% deposit is only $25,000 while a 10% deposit is $50,000.

It's far more realistic and achievable to save up $25,000 than $100,000, so low deposit loans enable you to get on the property ladder sooner.

Buying a property sooner means borrowing more and having a higher overall mortgage amount, but getting into the property market faster. If prices increase this puts you in a better position, because even with a small deposit, you're actually growing your equity and wealth via the property's capital gain in value.

The risks

A low deposit home loan means you may have to pay an LMI premium. This cost can range from several thousand dollars into the tens of thousands, depending on your deposit size and the cost of the property.

You may also pay more interest with a low deposit loan, simply because you're borrowing more money. Let's look at a basic example using Finder's LMI calculator.

Full vs low deposit home loans

The difference in cost is clear. With a 5% deposit you'll pay $15,888 in LMI on top. Alternatively, you could capitalise this cost onto your loan and borrow the LMI money along with your mortgage, so you don't need to pay the full amount upfront).

With a deposit of just $25,000, you'll also pay $300 more in repayments per month, or $3,600 a year.

You also need to consider how long it would take you to save $100,000 versus $25,000. It could take several more years to save a full $100,000 deposit in the example above, by which time home prices may have increased, meaning you need an even bigger deposit – or you have to pay LMI anyway, as your deposit is now worth less than 20%.

No deposit home loans

Most borrowers cannot borrow 100% of their property's value now. Lenders at most will lend you 95% and expect you to save at least a 5% deposit. But there is an exception: a home loan guarantor.

If your parents (or another family member potentially) own a property, they could guarantee a portion of your deposit for you. This means the guarantor is offering their property as security over your home loan. If you can't repay the debt, the lender can sell your home to recover the debt. And they could come after your guarantor's property too.

It's a slightly complicated and risky approach for the borrower (and their parents). But it's a lower risk prospect for the lender and the only true no deposit home loan option left in Australia.

Get creative with your deposit

Another way to get a home loan with a very low deposit is to get creative with how you pull your deposit together.

Here are some suggestions:

• Parental gift. If your parents are even more generous and financially comfortable, they could gift you the deposit or part of it.
• Use a first home owners grant. Many first home buyers can qualify for a grant of $10,000 (check our first home owners grant guide to see if you're eligible). This grant can form part of your deposit.
• Boost your savings. This is a hard one (obviously!). But basic saving and budgeting tips are always helpful. You could cut back on your spending, find extra sources of income or try to get more from your existing cash with a high interest savings account or term deposit to earn more interest.

Get more tips on saving a deposit for a house

How to apply for a low deposit home loan

It can be harder to get approved for a home loan with a lower deposit. The smaller your deposit, the bigger the risk you are to a lender.

Some lenders may put you on a higher interest rate if your deposit is below 20%. But it may just mean the lender looks more carefully at your mortgage application.

As a low deposit borrower, you need to ensure that your application paperwork is in order and your everyday spending under control.

Here are some tips to help you get approved:

• Check your credit score. Strengthen your chances of success by making sure there are no issues with your credit history.
• Check where and what you're buying. Some lenders impose higher lending requirements on apartment purchases in certain postcodes. They might require a 20% deposit or even 30% depending on what you're looking for, and where you want to buy.
• Examine your debts and spending. Strengthen your application by paying down debts such as credit cards – and as you repay them, lower the limits to avoid over-spending again. Try to limit your spending as much as you feasibly can before applying.
• Talk to a mortgage broker. Mortgage brokers don't just connect you to a lender, they help you find one that is likely to accept your application based on their eligibility requirements. Professional help might be just the thing you need.

Organise a free chat with a broker now

Advice from an expert

How do I compare low deposit mortgages?

When looking at low deposit home loans, the same basic principles apply for any home loan comparison. The biggest difference is you need to pay more attention to the maximum insured LVR that is on offer.

The main considerations are:

• Interest rate. With every home loan, a low interest rate means a cheaper home loan with lower repayments. Review and compare the most competitive interest rates available.
• LVR. Make sure the loan you are looking at has a maximum insured LVR of 90% or higher, if you don't have a 20% deposit saved.
• Loan type and repayments. Your loan has a purpose: to fund an investment property or your own home. Depending on this purpose, your loan type and repayment type may be principal and interest or interest only.
• Fixed or variable. You can choose between a fixed home loan rate or a variable rate. Fixed rates offer more certainty but less flexibility. Variable rates can change up or down, but tend to have more features and are less costly to refinance.
• Loan fees. Most home loans have fees, such as ongoing monthly account keeping fees or annual package fees.
• Features. Some home loans allow you to make extra repayments or come with an offset account. These features can help you pay less interest and pay off your home loan sooner.
• Lender. You can get a low deposit loan with a big bank, a small bank, or a lender that's entirely online. Different lenders may be willing to lend you more than others, or may be more accepting of low deposit borrowers. Some lenders don't offer any home loans to borrowers with deposits under 20%.

Find a low deposit home loan in your state or territory

Here's some more information about finding lenders, brokers and government support options for low deposit borrowers in your state or territory.

• NSW

  New South Wales

  There are many lenders in New South Wales offering loans with low deposit options, including lenders based in other states.

  There are specific regional-based lenders too, such as:

  • Newcastle Permanent
  • Greater Bank (based in Hamilton)
  • Bank of Sydney
  • Hume Bank
  • IMB

  Sydney residents can get in touch with a Sydney-based mortgage broker who can help you get a low deposit loan.

• VIC

  Victoria

  Here are some lenders in Victoria that may have low deposit lending options:

  • Bank of Melbourne
  • BankVic
  • G&C Mutual Bank
  • Bendigo Bank
  • Freedom Lend
  • Bank First

  Residents of Victoria's capital can get in touch with a Melbourne mortgage broker who can help you find a low deposit loan.

• QLD

  Queensland

  If you're looking to buy in Queensland then you can look at loans from most of the major lenders on the market but also Queensland-based lenders such as:

  • Bank of Queensland
  • Suncorp
  • RACQ Bank
  • loans.com.au (But as an online lender it doesn't have physical branches.)

  If you're in Brisbane, get in touch with a Brisbane-based mortgage broker who can help you find a low deposit loan.

  Another low deposit borrowing option in Queensland is a Queensland Housing Finance Loan. This is a state government scheme for eligible first home buyers and allows you to buy a property with just a 2% deposit.

  To qualify, you need to be a Queensland resident with a household income under $141,000 a year with no serious debts and good savings history and credit history.

  You can learn more on the Queensland government page.

  If you are buying or building a new house or unit valued at under $750,000 you may also qualify for the Queensland First Home Owners' Grant, worth $15,000. While the grant could be used as a deposit the Queensland government advises that "it's best not to count on using the grant as a deposit" because the timing of the payment depends on factors such as your application and the type of property you are building.

• SA

  South Australia

  Here are some lenders based in South Australia who may be able to help you:

  • BankSA
  • Adelaide Bank
  • Credit Union SA
  • Tiimely Home (But as an online lender it doesn't have physical branches.)

  You can also find a mortgage broker based in Adelaide.

• WA

  Western Australia

  Borrowers in Western Australia have access to a unique low deposit home loan called Keystart. This is a low deposit home loan that eligible borrowers can get with just a 2% deposit while avoiding lenders mortgage insurance.

  Find a mortgage broker in Perth.

• TAS

  Tasmania

  Here are some Tasmanian lenders who have low deposit home loans:

  • Bank of Heritage Isle
  • Bank of Us

  Get in touch with a mortgage broker in Hobart.

• ACT

  Australian Capital Territory

  The ACT no longer offers a grant for first home buyers but does offer stamp duty concessions.

  Find a mortgage broker in Canberra.

• NT

  Northern Territory

  The Northern Territory government and People's Choice Credit Union offer a scheme called HomeBuild Access. This is a low deposit home loan for new homes and the construction of new homes.

  To qualify for this loan your income needs to be under a certain limit and there are limits on the value of the property you are buying or building.

  The Northern Territory also offers a $10,000 first home owner grant for eligible buyers or builders of new homes.

Written by

Sarah Megginson

Head of editorial

As an authority on all things personal finance, Sarah Megginson is passionate about helping you save money and make money. She is an editor and money expert with 20 years’ experience and an extensive background in property and finance journalism. Sarah holds ASIC RG146-compliant Tier 1 Generic Knowledge certification, and she's a regular media commentator, appearing weekly on TV (Sunrise, Channel 7 news, Nine news), radio (KIIS FM, Triple M, 3AW, 2GB, 6PR) and in digital and print media. See full bio

Sarah's expertise

Sarah has written 183 Finder guides across topics including:

• Home loans
• Personal finance
• Budgeting and money-saving tips
• Managing the cost of living