Your guide to low deposit home loans

Low deposit home loans are an increasingly popular option for borrowers who have steady income but little in savings. Borrowers may be first home buyers, or those looking to buy an investment property, but with restricted savings. Many people think that you need at least a 20% deposit to get a home loan. But there are lenders who will approve qualifying borrowers for a low deposit home loan with as little as a 5% deposit.

Can a first home buyer get a low deposit home loan?

First home buyers often take out low deposit home loans, because they haven’t had time to accumulate significant savings. Australian states and territories offer various first homeowners grants and stamp duty exemptions or concessions to help eligible first-time buyers to buy a property with relatively small deposits. Some lenders may also accept gifted deposits for first home buyers. The reality is that many first-time borrowers get financial support from family members. However, not all lenders that offer low deposit home loans will accept gifted deposit monies. The more traditional lenders require evidence that the deposit has been saved consistently over time – usually over a minimum of at least three months. This assures the lender that the borrower can responsibly manage to pay regular loan repayments once the loan is in place.

What are the costs of a low deposit home loan?

A low deposit home loan typically represents a higher risk to the lender because the borrower is only contributing a small amount of their own money. For this reason, borrowers must pay a once-off premium called Lenders Mortgage Insurance (LMI). The borrower pays LMI to protect the lender in the event the property is sold, and the sale price doesn’t sufficiently cover the full loan amount including any accrued interest and costs. The LMI provider will then seek to recover any shortfall from the borrower. Depending on the loan amount and property value, LMI can cost thousands of dollars. Not great if you only have a 5% deposit to contribute. The good news is, there are lenders that will allow you to add the cost of the LMI premium into the low deposit home loan. That way, you don’t have to use your own savings to fund this expense and you can pay it over time. Different lenders set different criteria, so it’s important to do your research and find a lender who provides this feature.

Can I get a no deposit home loan?

In Australia, all lenders must adhere to responsible lending requirements, to ensure they don’t put a borrower into an unsuitable loan that creates unnecessary hardship. Lenders consider borrowers who can show strong savings behaviours less likely to default and put themselves in hardship. For this reason, lenders in Australia tend not to offer "no deposit" home loans. However, for borrowers who are asset rich but don’t have available cash for a deposit, a deposit bond can help. The deposit bond guarantees that you will provide 100% of the price to the vendor on settlement.

How do I compare low deposit home loans?

There are many comparison websites that allow you to compare the interest rates, features, and requirements for various loans including low deposit home loans. It is important to remember that the cheapest interest rate on the market may not necessarily be the best loan for your circumstances. When looking for a low deposit home loan, you want to also consider the loan features available, whether any loan costs can be added to the loan and the lender’s track history, for example.

Do I need a broker to get a low deposit home loan?

A trusted mortgage broker can help take the stress out of the home buying process – whether you’re a first home buyer or an experienced investor. If you are seeking a low deposit home loan, a broker can help you find a loan that works for you and your long-term financial strategy. A good mortgage adviser should be able to give examples of how other customers have rated their performance. It’s important you can trust your mortgage broker to look after you. After all, buying a property is a big step and not something you do every day!