A low-deposit home loan may be an appealing option for budding property owners who want to take out a home loan with a small deposit amount; however, they may end up paying more for the loan in the long run.
It may also be more difficult than usual to qualify for a 95% home loan, given the tougher lending conditions currently in place. Many banks are trying to reduce the risk associated with borrowers being unable to repay their mortgage if they have an unexpected change in circumstances, such as loss of employment or reduced pay, and are generally looking to reduce their exposure to bad debts amid the global coronavirus pandemic.
Westpac, one of Australia’s four major banks, is one such institution that has temporarily tightened home loan lending rules by introducing requirements such as that most new borrowers need to front up with at least a 20% deposit.
However, if you are a first home buyer, there is a possibility you could be eligible for a place on the First Home Loan Deposit Scheme. This is a scheme that allows a 10,000 eligible borrowers per financial year who have never bought a home before to have a 5% deposit and not pay Lender’s Mortgage Insurance, provided that they buy or build a home under a certain value in a specific location. Find out more about the scheme on Canstar’s First Home Loan Deposit Scheme hub page.
What is a 95% home loan?
A 95% home loan, or 95% mortgage, is a low-deposit home loan that enables you to borrow up to 95% of the total value of a property you’re buying. This means borrowers are only required to make a 5% deposit on the home loan for the property, which is much lower than the standard 20% deposit that most home loans require.
95% home loans are also called 95% LVR loans, referring to the LVR or loan-to-valuation ratio of the loan.
This type of loan is generally considered by most Australian lenders to be a higher lending risk than an 80% LVR (20% deposit) loan. Therefore, borrowers may find the application process is stricter than it would be for a 20% deposit loan and they are likely to be charged Lender’s Mortgage Insurance (LMI) by the lender.
However, some borrowers who work in certain industries can get a loan with an LVR of more than 80% (including 95% home loans) without having to pay LMI. We cover this in greater detail further on.
→ Related story: What is LVR and what can it mean for your home loan?
Top interest rates for 95% or higher LVR home loans
The comparison table below displays some of the variable rate home loan products available on Canstar’s database for first home buyers with links to lenders’ websites. The products displayed are based on loan amounts of $350,000, $400,000 and $500,000 at 95% LVR in NSW, available for principal and interest repayments. The results are sorted by current interest rate (lowest to highest), then by provider name (alphabetically). Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.
Who can apply for 95% home loans?
Not every borrower will be eligible to apply for 95% home loans. While the exact assessment criteria you face can vary depending on your lender and personal situation, you may need to have some of the following characteristics:
- Good credit history
- Stable employment
- Genuine savings of 5% of the property’s value for the deposit
- High income compared to the loan you want (serviceability ratio)
- Own some assets
- Low or no other debts (e.g. credit cards, personal loans)
If you make an application for a 95% home loan, you may need to demonstrate that you are capable of making the monthly repayments. Borrowers will generally need to have a high credit score with a history of consistently repaying loans and credit cards. 95% home loans therefore may not be suitable for those who are struggling financially. Lenders may also be hesitant to offer 95% home loans for large mortgages, meaning that investors or home buyers looking for a higher-end property may not necessarily be well-suited to a 95% home loan.
→ Related story: What is a good credit score and how do you get one?
How to apply for a 95% mortgage
Borrowing 95% of the property’s value and making a deposit of just 5% is generally more difficult than applying for a standard home loan, and you may need to meet stricter criteria in order to get approved. While the policies vary from lender to lender, you will typically need to meet the following requirements:
- Be at least 18 years old
- Be a permanent Australian resident or citizen
- Have a good credit history
- Have enough savings or assets for the deposit
- Proof of your employment history
If you don’t yet have enough in savings for the deposit you need, we have some budgeting and saving tips which may help you reach your goals.
When you’re ready to move forward with your application, you may need a range of documents on hand, including proof of identification such as a driver’s licence or passport, employment details such as a payslip, and other relevant financial documents like your most recent tax return.
→ Related story: How to apply for home loan pre-approval
Common features of 95% home loans
- Redraw facilities: A home loan redraw facility is a feature that allows you to withdraw additional repayments you’ve already contributed to the loan.
- Offset accounts: A mortgage offset account is a savings or transaction account linked to your home loan. The balance in this account is offset against the balance of your home loan, so that you pay interest on less of your loan balance.
- Additional repayments: Most home loans allow you to make additional repayments on top of the required monthly repayments. Making additional repayments helps to pay off the loan quicker, thus paying less interest.
- Loan term: Like any other type of home loan, most 95% home loans come with a 25-year or 30-year loan term for you to repay the loan.
- Other key features: Features such as split loan facilities and pre-approval are also common in home loans.
You can check to see whether the loan you’re applying for has these features by contacting your lender, or you can start by comparing your options on the Canstar website.
Compare 95% home loans with Canstar
If you’re ready to look for a 95% mortgage, there is a wide range of options in terms of products and lenders on the market. To help you choose a home loan and a lender that can meet your needs, Canstar compares more than 4,000 home loans in Australia.
This article has been updated and was originally published by William Jolly.