Many Australians take their time before buying property and try and save up 20% deposit so they don’t need to pay lenders mortgage insurance – but with low deposit home loans, you can become a homeowner much sooner.
It’s possible to be approved for a home loan with only a 5% deposit if you have:
- a perfect credit history,
- little to no debts or credit cards, and
- good employment history with a consistent salary.
If you’re interested in how low deposit home loans work and how to get one, we’ve compiled this guide just for you.
Why Some Borrowers Wait To Secure a 20% Deposit
While having 20% deposit saved up can be beneficial, you can still buy a property with much less – and still enjoy the same benefits.
The most obvious reason people choose to pay a larger deposit is to keep their monthly mortgage repayments as low as possible. The more deposit you pay, the smaller the home loan you need to take out and pay back.
Another reason is to avoid having to pay the fees like lenders mortgage insurance (LMI).
Why Banks Require Lenders Mortgage Insurance (LMI)
Lenders need some form of security to protect themselves in case of borrowers defaulting on their mortgage repayments.
If a house needs to be repossessed, there is the possibility that the property’s value could have decreased since it was bought, thus the bank is unable to recoup their money back.
As a result, banks take out insurance on home loans with less than a 20% deposit – that the borrower is liable to pay.
A 20% deposit is considered enough security not to need this insurance. So, many people save up a 20% deposit to avoid the extra monthly cost of LMI.
Low deposit home loans, therefore, require LMI.
But, there are ways to pay a low deposit, and waive the LMI fees altogether.
How a Low Deposit Home Loan Works
Any home loan where a borrower needs to borrow more then 80% of the property’s value, meaning they are paying less than 20% deposit, counts as a low deposit home loan.
Low deposit home loans are also known as high loan to value ratio (LVR) home loans.
If you meet the lending criteria, lenders will approve a low deposit so long as you provide them with the security by paying LMI.
In most cases, lenders do require proof of at least 5% in genuine savings. This can’t be money that parents gifted, inherited or even won in the lottery. Lenders want the savings to be genuine as a form of proof that the borrower can manage their money adequately over an extended period.
This is another way that lenders try to reduce their risks.
Besides having to pay mortgage insurance and having 5% in genuine savings, a low deposit home loan is quite similar to a standard home loan.
Home buyers with a low deposit loan can:
- choose between a fixed interest rate, variable interest rate, or opt for split-interest,
- structure their mortgage repayments as interest-only or principal and interest, and
- access features such as an offset account or redraw facility to make extra repayments.
What You Need to Apply For a Low Deposit Home Loan
As well as all the documents required for a standard home loan application, there are a few eligibility criteria that need to be met.
- A good income: a smaller deposit means more money to pay back, so lenders prefer borrowers applying for a low deposit loan to have a good serviceability ratio – proof of enough income to afford the mortgage repayments comfortably.
- 5% of genuine savings: generally, this can be three months proof of regularly putting money into a savings account.
- Minimal debt: try to pay off as much debt as possible, and close any unnecessary credit cards to avoid red flags.
- Consistent employment history: you will need to prove that you have had the same job for six to 12 months.
- A good credit history: all expenses, bills and utilities should be paid punctually for at least the past six months, and your credit history should show no defaults.
- A good asset position: in relation to a person’s age and income, lenders expect them to have secured certain assets.
Keep in mind that lenders consider a credit record with many credit enquiries as high risk. Therefore, don’t apply for any type of home loan until you have all the correct paperwork and are in a viable position to be approved.
Employing the skills of a mortgage broker can be very helpful, as they can help you prepare your application.
How To Get a Low Deposit Home Loan Without Paying LMI
Some home buyers can pay a home loan deposit of less than 20% and avoid paying LMI.
Certain professionals, for example doctors, are eligible for an LMI waiver because they earn consistently high salaries purely based on their type of job. Therefore, lenders see them as low risk and will allow them to pay a small deposit without having to cover LMI.
If your parents own their own home or investment property and have done so for many years, you could be eligible for a family pledge loan. Your parents will act as guarantors and use the equity in their property to provide your lender security rather than needing mortgage insurance on your home loan.
If you are a first home buyer, you can apply online for a first home owner grant. Check whether you are eligible before applying or ask your lender to apply on your behalf, and they’ll help you through the process.
Another option for a first home buyer is the first home loan deposit scheme. Rather than LMI providing the bank security, in this case, the NHFIC acts as a guarantor for your home loan. This is up to a maximum of 15%, so if you’re eligible, you can pay only a 5% deposit and no LMI.
How the Mortgage Agency Can Help
Home buyers interested in applying for a home loan with a small deposit should get in touch with one of our mortgage brokers.
Buying a home can be confusing and overwhelming, especially if it’s your first home. We can guide you through every step of the process and provide advice suited to your personal situation.
Our mortgage brokers will provide insight into which type of home loans you should consider, which features will be to your benefit, and whether your savings are enough to use as a deposit.
We know which banks are good lenders in approving you, and we help you prepare your loan application.
It doesn’t stop there, our mortgage brokers will always negotiate the best interest rate for our clients, and we always keep our clients aware of the additional and upfront costs tied to home loans such as stamp duty.
Whether you want to buy a home or an investment property, using a 5% deposit or a first home owner grant, get started with us sooner rather than later, and get in touch today.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.