Low deposit home loans are a great way for first home buyers to get into the property market, so you can compare offers with Savvy.
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First-time homebuyers are often keen to get into the property market as soon as possible but saving up a sizeable deposit can take years. With the Australian median house price nearing $1M by the end of 2021, it’s getting harder for first-time buyers to get a foot in the housing market.
However, there are many low deposit home loans available for first home buyers to help with the cost of buying their first property. Compare home loans for first home buyers with Savvy to make sure you’re getting the best deal possible, as you can find the lowest interest rate and best overall deal to potentially save you thousands over the life of your loan.
A low deposit loan is any home loan where the deposit is less than the standard 20% normally required by lenders as security for a mortgage. Such small deposit home loans are usually aimed at first home buyers trying to get a foot into the property market.
To understand low deposit loans, it’s also useful to understand what a loan-to-value ratio (LVR) is. LVR is a percentage figure which represents the size of the loan you’re after compared to the total value of the property you wish to buy. Standard LVR is 80%, which means the lender is prepared to loan 80% of the value of the property, leaving a further 20% of property value to be supplied as a deposit.
As such, low deposit loans include those where the LVR is 85%, 90% or 95% (meaning the lender only requires 15%, 10% or 5% of the value of the property as a deposit, respectively). Small deposit home loans are also referred to as ‘high LVR’ loans.
The key to understanding how low deposit home loans are possible in most cases is to know about Lenders Mortgage Insurance (). This is an insurance premium paid by the borrower which protects the lender against the increased risk of lending more than 80% of the price of a property. LMI is frequently paid by first time buyers wanting to take advantage of low deposit mortgages. Â
Borrowers who are prepared to pay LMI can be accepted for loans with a deposit of anywhere between 5% and 19%. However, it’s calculated based on the size of the principal sum you want to borrow and can cost in the region of thousands of dollars.
For example, if you’re after a small deposit mortgage for a property valued at $500,000, such as one with a 90% LVR, you’d need to contribute $50,000 as a deposit and the LMI would be approximately $7,920.
First home buyer government assistance
Low deposit mortgages for first-time buyers go hand in hand with government grants which are also aimed at helping first purchasers who have a small deposit.
The Australian Federal Government’s First Home Loan Deposit Scheme is aimed at first home buyers who have at least a 5% deposit. The scheme guarantees up to 15% of the value of the property, so the first home buyer doesn’t have to pay LMI. Properties that are eligible to purchase under this scheme include:
To qualify for this scheme, applicants have to be:
State government assistance for first home buyers
In addition, state governments also offer assistance to first home buyers needing a small deposit mortgage. Known as the First Home Owner Grant, this scheme was introduced in July 2000 to offset the effect of the GST on home ownership.Â
Conditions, terms and eligibility criteria vary between the states, so check your state’s particular rules to see if you can benefit from this scheme. Most schemes offer a lump sum payment (around $10,000 to $15,000) or exemption from stamp duty to assist first home buyers.
Another way to get a mortgage with a small deposit is to ask a family member to stand as a guarantor for your loan. A guarantor has to offer security to the lender and agree to be responsible for repaying your mortgage if you become unable to. Frequently, parents offer the equity they have in their own home as security for their child’s mortgage. In some instances, if the parents have sufficient equity to offer as security, the child does not require a deposit at all.
Family members sometimes also assist their children to get into the property market by loaning or gifting them the deposit for their first home loan. Such a loan may save the borrower from paying LMI as they can then provide the required 20% deposit, which can be used alongside a government grant.
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Applying for a low deposit home loan will enable you to get into the housing market years sooner than if you’d had to save up thousands of dollars for a larger 20% deposit.
As house prices rise, so too will your home loan equity. Building up your home equity will increase your overall wealth, which will enable you to have more financial freedom in your later years.
The sooner you start building up your home loan equity, the sooner you may be able to pay off your home loan and save thousands of dollars in interest.
As you pay off your home loan, and the price of your house rises, you may soon find you have sufficient home loan equity to refinance your mortgage to a loan with a lower interest rate.
LMI can be costly and amount to thousands of dollars, so it’s well worth weighing up the costs involved compared to waiting until a larger deposit is affordable. Ask your particular lender for an LMI quote, as the amounts do vary between lenders.
When lenders take on increased risk (such as approving a loan with a lower deposit), they often impose more stringent lending criteria on prospective borrowers. For example, they may specify that both applicants in a co-borrower agreement must be working full-time and have been in their current employment for more than 12 months.
Higher risk attracts higher interest rates. It would be unrealistic to expect lenders to offer their lowest possible interest rates to higher-risk lenders, so you can instead expect your low deposit home loan to come with a slightly higher variable interest rate.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
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© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
