Low Deposit Home Loans

For many Australians, saving for a large home loan deposit can be a major hurdle to buying a home. A low-deposit home loan is designed for those who want to enter the property market without waiting years to save a 20% deposit.

This type of loan is ideal for:

• First-home buyers who don’t have a large deposit but have stable income.
• Home buyers who want to secure a property before prices rise further.
• Investors looking to leverage their funds while maintaining cash flow.

With options to borrow up to 95% of the property value – and even 100% with a guarantor – a low-deposit home loan can be a smart way to buy a home with less upfront capital. Let’s explore how it works, who qualifies, and how you can apply.

What Is A Low-Deposit Home Loan?

A low-deposit home loan allows homebuyers to purchase a property with a deposit smaller than the traditional 20%, typically starting from 5% with most lenders but as low as 2% through government-backed schemes. This can make it easier for people to enter the property market sooner.

How Do Low-Deposit Loans Work?

Low-deposit home loans allow individuals to purchase property with a smaller initial deposit than the standard 20% of the property’s value. This is particularly helpful for first-home buyers or those struggling to save a large deposit due to living expenses. While these loans make entering the property market more accessible, the borrowers are required to pay Lenders Mortgage Insurance (LMI) – a one-off payment that protects the lender against financial loss if the borrower defaults on the loan.

Government Help For Low-Deposit Borrowers

Besides lenders offering their low-deposit home loan products, there are several federal government schemes and grants that can help you buy your home sooner.

• The Home Guarantee Scheme: The government guarantees loans so eligible homebuyers avoid paying LMI, even with a deposit as low as 2% of the property value.
  • First Home Guarantee (as little as 5% deposit)
  • Regional First Home Buyer Guarantee (as little as 5% deposit)
  • Family Home Guarantee (as little as 2% deposit)
• The Help to Buy Scheme is a shared-equity scheme wherein the government helps first-home buyers purchase a home by contributing up to 40% of the property price for a new home and up to 30% for an existing one.(Note: This scheme is pending legislation and has not yet been implemented.)

What Are The Pros And Cons Of Low-Deposit Home Loans?

Pros

• Allows entry into the property market sooner.
• Helps break the rental cycle by shifting you from renting to owning a home.
• Offers a range of low-deposit home loan options that suit your financial situation, with flexible terms and repayment schedules that can align with long-term goals.
• Entering the property market earlier gives the investment more time to grow, potentially increasing equity as property values appreciate.
• Contrary to common misconceptions, low-deposit home loans can come with competitive interest rates, provided you meet the requirements.

Cons

• You need to pay LMI unless you qualify for a waiver.
• Smaller deposits lead to lower initial equity in the property, which can limit future options for accessing equity for renovations or investments.
• In the event of a property market downturn, homes purchased with lower deposits may be more vulnerable to negative equity, in which the loan amount exceeds the property’s value.
• Lenders might have stricter criteria for low-deposit loans, including more thorough assessments of your financial stability and creditworthiness.

Who Can Qualify For Low-Deposit Home Loans?

While most lenders have strict lending criteria for borrowers with small deposits, you can qualify for low-deposit home loans if you meet the following requirements:

• You have a stable income.
• You have employment stability (full-time for at least 5 months in your current role or 2+ years in the same field)
• You have a clean credit file and a good credit score (no defaults or late payments on loans, credit cards or rent)
• You have at least 5% in genuine savings (saved over a minimum of 3 months)
• The property meets the lender’s criteria (some types, like high-rise units or mining towns properties, may have restrictions)
• Your asset position is reasonable (assets like savings or a vehicle should align with your income and age)
• Your debts should be at a manageable level (lenders will look at how your income compares with your current financial commitments).

How To Apply For A Low-Deposit Home Loan

The application process for a low-deposit home loan follows a standard home loan process, but lenders apply stricter assessments due to the high LVR.

The first step is to speak with a mortgage broker, like one at Home Loan Experts, who will assess your situation, check your eligibility, compare lenders, and help you prepare your loan application.

Once you have pre-approval, you can start looking for a suitable property. After you’ve found the right home and signed the Contract of Sale, your broker will guide you through to final approval and settlement, making the process as smooth as possible.