Low deposit home loans

Can you buy a house with a low deposit?

Yes, it is possible to buy a house with a low deposit, which is generally considered to be anything under 20% of the purchase price. But, it may be harder to be approved for a home loan, and you may have to pay more in loan fees.

That’s because lenders generally like you to have at least 20% (also known as 80% loan-to-value ratio or LVR) of the purchase price of a property as a deposit.

Anything less than this and you may have to pay Lender’s Mortgage Insurance (LMI) to protect the lender if you get into a situation where you default on the loan. The cost depends on the size of your loan, but can add thousands of dollars to your mortgage cost.

If you are a first home buyer with a low deposit you may be eligible for government incentives and schemes aimed at making home ownership more achievable, such as the First Home Guarantee.

This allows a limited number of eligible borrowers each financial year who have never bought a home before to get a home loan with as little as a 5% deposit, without needing to stump up for LMI.

There’s also the Regional First Home Buyer Support Scheme, due to start in January 2023. This will work in a similar way to the First Home Guarantee, but only for borrowers who are buying outside capital cities.

Another option for those seeking federal government support could be the “Help to Buy” scheme, which will let eligible homebuyers with a deposit of at least 2% receive a government contribution to help buy their home, provided they qualify for a low deposit home loan with a participating lender.

If these schemes are not for you then you might be able to find someone to act as guarantor of your home loan, but the federal government’s Moneysmart website warns there are risks involved.

Read more: Compare 95% home loans

The pros and cons of a low deposit home loan

There are many things you need to consider if you are thinking of applying for a low deposit home loan.

For example, you may be able to buy a home sooner if you don’t have to save for the 20% deposit to avoid paying any LMI. This may be attractive if you’re paying rent and want to own your own home.

This may also be attractive when house prices are rising as the amount you’d need to save for a 20% deposit would also be increasing.

The disadvantage of a low deposit home loan is that you may then have to pay LMI, which can be expensive. You may have to pay this up front or you could add it to your home loan, but that would increase your home loan repayments.

Some lenders may charge higher interest or other fees and charges for a low deposit loan, or in other words, a loan with a high LVR.

A low deposit home loan also means you are borrowing more from a lender and that means you’ll be paying more in interest over time.

For example, say you want to buy a $500,000 property and have a 20% deposit of $100,000. Using Canstar’s mortgage calculator on a principal and interest loan of $400,000, that means you’ll be paying $2,147 in monthly repayments if the loan is taken out over 30 years at 5% interest.

That’s a total of $373,023 in interest alone over the period of the loan. That is not taking into account other fees and charges, and assuming that the interest rate does not change over the length of the loan.

If you have a 10% deposit of $50,000 you’d need a loan of $450,000. That means you’ll be paying $2,416 in monthly repayments, a total of $419,651 in interest.That’s not taking into account any LMI or other fees and charges that may apply, and assumes that the interest rate stays at 5% for the full 30 years.

A 5% deposit of $25,000 needs a loan of $475,000. That leads to monthly repayments of $2,550 and a total interest of $442,965. Again, not taking into account any other costs or changing interest rates.

The Australian Prudential Regulation Authority (APRA), which supervises the banking industry, requires lenders to make sure borrowers can cope with some level of increase in the interest rate that would push up their regular repayments.

You may be able to reduce the amount of total interest you pay if you can change the frequency of your home loan repayments.

Also, it’s important to note that some lenders may waive LMI on a low deposit home loan in some circumstances, including for borrowers who work in certain professions. You may want to shop around to see what different potential lenders are prepared to offer.

Who can apply for low deposit home loans?

Not everyone will be eligible for a low deposit home loan. The assessment criteria you face can vary depending on your lender and personal situation, but you may need to have some of the following characteristics:

• a good credit history
• stable employment
• genuine savings for the deposit
• high income compared to the loan you want
• own other assets
• low or no other debts (e.g. credit cards, personal loans).

If you make an application for a low deposit home loan, you will need to demonstrate that you are capable of making the monthly repayments.

You will generally need to have a high credit score with a history of consistently repaying any loans and credit cards you’ve taken out. That means a low deposit home loan may not be suitable for those who are struggling financially.

Lenders may also be hesitant to offer low deposit home loans for large mortgages, meaning home buyers looking for a higher-end property may not necessarily be well-suited to a low deposit home loan.

Read more: How to use equity to buy a second property with no deposit

It could be a good idea to check out a number of potential lenders to see who offers the best deal to suit your needs. You might also consider seeking some independent financial advice or approaching a mortgage broker who may be able to help.

If, in the end you decide a low deposit home loan is not for you then you, then we have some budgeting and saving tips that may help you save for that 20% deposit.

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