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Low Deposit Home Loans for First Home Buyers

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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, updated on August 31st, 2023       

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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.

How do low deposit home loans work?

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.

How do I get a low deposit home loan as a first home buyer?

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.  

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:

  • an existing house, townhouse or apartment
  • a house and land package
  • vacant land, plus a separate contract to build a home
  • an off-the-plan apartment or townhouse

To qualify for this scheme, applicants have to be:

  • at least 18 years of age
  • first home buyers intending to live in their new property
  • Australian citizens
  • single applicants earning up to $125,000
  • married or de-facto couples with a combined income of no more than $200,000

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. 

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.

Do I have any other options for a low-deposit mortgage?

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.

The pros and cons of low deposit home loans

PROS

Get into the housing market sooner

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.

Build equity as house prices rise

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.

Pay off your loan earlier in life

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.

Refinance to a lower interest rate later on

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.

CONS

May have to pay Lenders Mortgage Insurance

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.

More stringent lending criteria may apply

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.

Lowest interest rates may not be available

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.

Got a question about low deposit home loans?

Are there any low deposit options for building my house?

Yes – low deposit construction loans are available too, and the government’s First Home Loan Deposit Scheme covers building a new house as well as buying an existing home.

Can I have stamp duty covered by my home loan?

Stamp duty is a state government tax on property purchase.  The amount of stamp duty you have to pay varies from state to state, but it always has to be paid upfront.  It can be taken out of your deposit, but bear in mind that reducing the deposit you have will mean you need to borrow more, and therefore pay more interest.

Am I able to take out a low deposit home loan if I'm a casual employee?

Possibly – but the rules vary between lenders.  Ask your lender for their employment eligibility criteria to make sure you comply.  With a wide range of lenders to choose from, you can compare options to find one that’s the right fit for your circumstances with Savvy.

Can I get a First Home Owner Grant if I want to build my first house?

Yes – it’s highly likely that you’ll be able to get FHOG if you want to build your first home.  However, rules do differ between states, so check on your state government website for the latest information.

Can I get an interest-only low deposit home loan as a first-time buyer?

You possibly could, particularly if you want to build your first home, but once you’ve finished building, it might make more sense to refinance to a principal and interest loan to start reducing the principal you owe and build up your home equity.  Interest-only loans often end up costing the borrower more in interest payments over the long term (as long as the property is not bought as a short-term investment to renovate and sell it quickly).

Is it best to fix the interest rate on my home loan as a first home buyer?

This will depend on your situation.  A fixed interest rate provides peace of mind because you know your home loan repayments will stay the same for the fixed term you agree to. You’ll be protected from variable rate increases.  On the flip side, it also means you won’t benefit from any declines in the interest rate, either.  Weigh up which option is right for you before agreeing on your home loan.

If my parents agree to go as guarantors for me, can I take their names off later?

Yes – once you’ve built up some equity in your home (which is the equivalent of a 20% deposit), you’ll be able to refinance and remove your parents’ guarantee from your loan.

I am a first home buyer, but my partner is not. Can we jointly apply for a First Home Owners Grant?

No – the eligibility criteria for the FHOG states that all parties must be first home owners, including the partners of applicants.  If your partner has owned property in Australia before, you aren’t eligible to apply for the FHOG together.

Can I get a personal loan to use as my home loan deposit?

In theory, you can, although not all lenders will allow a deposit to be borrowed through a personal loan.  The problem is that you’ll then have to repay both the personal loan and your new home loan, which may strain your finances and reduce the amount you’re able to borrow.  If you can afford to pay two loans, your income may be better used to save up a larger deposit rather than paying higher interest on a personal loan.

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