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Low deposit home loans

Do you want to buy a home but you don’t have much deposit? You can still get a home loan in Australia.

Low deposit home loans

Low deposit home loans are an option for Australian buyers. This article will explain the pros and cons of this type of finance. It will also provide with you tips to increase your chances of having your application approved.

What is a low deposit home loan?

A low deposit home loan is one where you can’t provide sufficient deposit to qualify for a standard home loan.  Most lenders will require a deposit of 20% for you to qualify for a standard home loan.

Not having a 20% deposit means you need to borrow more than 80% of the cost of buying your home.

You should be aware that there are also additional costs beyond a home’s purchase price. They include stamp duty and conveyancing costs to transfer the title of your home from the seller to you. They can also include loan application fees.

The table below shows how much a 20% deposit is for a variety of home values.

Home value 20% deposit
$300,000
$60,000
$400,000
$80,000
$500,000
$100,000
$600,000
$120,000
$700,000
$140,000
$800,000
$160,000

These figures can seem unreachable in the short term! But all is not lost. It is possible to enter the property market even if you can’t raise a 20% deposit.

Some lenders may be prepared to offer you a low deposit home loan instead. However, you will need to meet their criteria for approval. The approval criteria varies among lenders.

Are there extra costs with a low deposit home loan?

Yes.

Low deposit home loans are perceived as being higher risk by lenders. They tend to have a higher interest rate accordingly. This means that your regular repayments will be higher. You’ll also pay more interest over the life of your loan.

The table below shows the difference even a 1% higher interest rate can make on a 25-year home loan.

Loan amount Interest rate Monthly repayment Total interest payable
$500,000
3%
$2,371
$211,317
$500,000
4%
$2,639
$291,755
$500,000
5%
$2,923
$376,885
$500,000
6%
$3,222
$466,452

Low deposit home loan lenders will also usually require you to have Lenders Mortgage Insurance (LMI) Explained (LMI). If you fail to make your repayments, this insurance protects the lender if. LMI cost depends on how much you borrow and your deposit. However, it can be over $10,000 an average Australian home.

The cost of LMI is typically added to your loan amount, so you are charged interest on it as well.

How common are low deposit home loans in Australia?

Low deposit home loans are less common now in Australia than they once were. There are two major reasons for that.

1)     The introduction of tougher lending restrictions in 2010 under the National Credit Code. These restrictions are designed to protect consumers from taking out loans they can’t afford.

2)     The introduction of various government schemes to help first home buyers come up with their deposit. Those schemes include the:

·     First Home Owner Grant (FHOG).

    The FHOG is available across all Australian States and Territories (except the ACT), but
the amounts and eligibility criteria vary.

·     First Home Loan Deposit Scheme (FHLDS).

The FHLDS helps eligible first home buyers to avoid the cost of LMI. The buyer needs to provide at least
a 5% deposit.

The government then provides a lender guarantee of up to 15% of the value of an eligible first

buyer’s home. This guarantee reduces the lender’s risk and removes the need for
LMI.

·     First Home Super Saver Scheme (FHSSS).

This  Scheme enables first home buyers to withdraw voluntary contributions made to their super. The maximum that can be withdrawn is $30,000. The amount must be used as a deposit for a home.

·     The HomeBuilder Scheme.

HomeBuilder was a temporary $25,000 federal government grant available for people building new homes after the COVID-19 pandemic.

How do you compare low deposit home loans?

There are a number of things you should look at when comparing low deposit home loan products. They include the:

  • Minimum deposit the lender requires

Some lenders will require more deposit than others. For example, some may be prepared to accept a 5% deposit, while others may require a minimum of 10%. Obviously the lower the minimum deposit amount, the more you have to borrow.

  • Comparison interest rate

Two interest rates are usually advertised on a home loan: the nominal rate and the comparison rate. The nominal rate is the lower of the two, but it only includes the cost of interest.

The higher comparison rate on the other hand includes the cost of interest plus loan fees and charges. It therefore reflects the total cost. As the name suggests, it is the rate you should use to compare different loan products. Choose the most suitable loan with the lowest comparison rate.

  • Optional loan features

Some low deposit loans will come with optional additional features. For example, offset accounts and redraw facilities. These can be useful features if you need them and will use them.

However, these features usually come at a cost. There is no point paying for them if you won’t use them and get the benefits.

How much can I borrow for a low deposit home loan?

Again, the criteria of different lenders varies. However, their primary concern when assessing your application is your ability and likelihood of making your repayments.

They will assess a number of factors, including your income, expenses and credit history. Your credit history is your record of paying your debts and bills on time.

You can get an idea of how much you can borrow by using our calculator.

There are several ways you can improve your borrowing power without increasing your deposit:

  • Increasing your income

For example, if you get a promotion and a pay rise at work.

  • Reducing your expenses

Your expenses can be divided into two categories: essential and non-essential. You should aim to eliminate or reduce as many of your non-essential expenses as possible. This will enable you to have more money available for home loan repayments, increasing your borrowing power.

  • Taking out your home loan over a longer term

For example, by taking out your loan over 30 years rather than 25. This will lower your repayments so you can afford to borrow more.

  • Taking out a loan with a lower comparison rate

You’ll be charged less interest and you’ll be able to afford repayments on a higher amount.

What documents do I need for a low deposit home loan application?

Again, the requirements of different lenders vary, but you will usually need to supply similar documents to a standard home loan application. They include:

  • three forms of ID (e.g. your licence, Medicare card and passport).
  • your contract of sale.
  • evidence of any deposit you can provide.
  • bank transaction history statements.
  • your two most recent payslips (if you are an employee).
 

If you are self-employed and won’t be able to supply payslips, you need to prove your income stability. You can do this by providing:

  • your tax returns for the past two or three financial years.
  • business financial statements for your business for the past two or three years. For example, your income statements, business activity statements (BAS) and balance sheet. It’s best if these statements have been prepared by an accountant.

The pros and cons of low deposit home loans

It’s important to be aware of both the advantages and disadvantages of this type of finance before you apply

PROS

They allow you to buy a property sooner than if you had to save up for a higher deposit.

You may be able to buy a property cheaper than if you had to save for a higher deposit. It can take years to save for a deposit and property prices tend to increase over time.

They allow you to stop paying rent and to start paying for your own home instead. There’s an old saying that ‘rent money is dead money’. Home loan repayments on the other hand help you to build equity in your home. Buying your own home is a proven way to increase long-term wealth.

CONS

Interest rates are usually higher than standard home loan products.

They can have higher fees than standard home loan products.

You will have to pay for the cost of LMI with a low deposit loan.

Top tips for getting low deposit home loans

Increase your chances of being approved by getting ‘all your ducks in a row’ before you apply to a lender!

Establish a good credit score before you apply

Lenders will research your credit history when you apply for any finance.  If you have a good credit score, you’ll find it easier to get your low deposit home loan approved. If you don’t, you’ll find it harder.

Have a steady employment history

Lenders prefer applicants with stable jobs. Ideally, you should have been with the same employer for a year or more if you have a low deposit. If you change jobs regularly, lenders will perceive you as being an even higher risk.

Have a steady income

Lenders also prefer applicants with stable incomes.  If your income fluctuates, again they will perceive you as being higher risk. Your application may be declined.

Get into the habit of budgeting and saving

Lenders like to see evidence of your budgeting and savings habits when you apply for finance. If you can demonstrate that you regularly save money, it will give them confidence you will make your repayments. They will be more likely to approve your low deposit loan application.

Have low or minimal other debt

This will maximise your borrowing power because you’ll be able to afford higher repayments on your home loan. You should demonstrate your full ownership of other assets like your car.

What else you need to know about low deposit home loans

Like to know more about this type of finance? Here are other FAQs and the answers you need to know.

Who offers low deposit home loans in Australia?

Not all lenders in Australia offer low deposit home loans. However, there are many that do, including:

  • banks,
  • building societies,
  • credit unions, and
  • other non-bank lenders.
What is a loan-to-value ratio (LVR) and why is it important?

This is a finance term. It expresses the loan amount you’re applying for in relation to the value of your home. If your LVR is higher than 80%, you will usually need to apply for a low deposit loan. It means that your deposit is less than 20% of the value of your home.

Can I get a low deposit home loan with bad credit?

Probably not.

Bad credit home loans are available, but you’ll usually be required to come up with a 20% deposit due to your bad credit history.

Can I find out my credit score before I apply for a low deposit home loan?

Yes.

Your credit score is compiled by a variety of credit reporting agencies in Australia, including illion, Equifax and Experian. You have a legal right to access your credit score for free every 12 months.

How can I improve my credit score?

The simplest way to improve your credit score is to pay all your bills on time. This includes your rent and mobile phone plan, as well as electricity and gas bills.

If you have any overdue debts, repay what you owe straight away and don’t be late with any future payments.

Can you get ‘no deposit’ home loans in Australia?

Yes, it’s possible to get a 100% home loan. However, you will be asked to provide a guarantor or to use equity you have in another property as security. If you don’t have any equity in another property, finding a guarantor is your only option. The guarantor must also be approved by your lender, so it must be a person who meets their lending criteria.

What is a guarantor?

A guarantor is a person (usually a family member) who agrees to take legal responsibility for your loan if you fail to make your repayments. This is an arrangement that neither you nor your guarantor should enter into without first considering this possible scenario.