5% deposit home loans

It's possible to get a home loan with a 5% deposit. Compare your options and find out how it works.

By   |   Verified by David Boyd   |   Updated 11th August 2021

Comparing 5% deposit home loans for $450,000.00 over 30 years

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Overview

Home ownership is a dream for many Australians, but many find it difficult to save up the standard 20% deposit that lenders ask for when you apply for a home loan.

Saving up for a deposit can be challenging for some people, and the Australian government recognise that. So do many of the lenders. That is why there are various concessions, grants, and other support mechanisms available to help people get a home loan without a 20% deposit of the value of the property.

Can I really get a home loan with a low deposit?

Yes you can. There are a few ways in which you can get approved for a home loan with a deposit of 5% of loan value. Your choices widened recently with the Australian government introducing the 2021 First Home Loan Deposit Scheme (details below).

Typically most people buying a home require a deposit to the value of 20% of the home purchase value in order to avoid LMI.

Many lenders accept applications with a smaller deposit, of say 10% or even 5% if you can meet certain conditions.

You get Loan Mortgage Insurance

If you are willing to pay for LMI — which can add thousands of dollars to the total cost of your loan — then you can get a home loan with a deposit less than 20% LVR from many lenders. The cost of LMI can depend on the property value, loan amount, and the size of your deposit. It can also vary by the lender and their LMI provider.

Just because you take LMI you are not off the hook if you are unable to pay back the loan. Your lender may be secure because of it, but the insurance company will come after you to get the outstanding amount.

If you are going for this option, you are better off talking to a mortgage broker because they would be in a position to recommend the best lenders who would work with low deposit borrowers. They would also know lenders with less costly LMI.

You can find a guarantor

If you can get your parents or someone else with home equity or ability to show they can pay your loan installments in case you are unable to, many lenders would give you a home loan with a deposit that’s less than the standard 20%. Then it becomes a guarantor home loan.

You are eligible for various government support schemes

Federal as well as state and territory governments across Australia encourage home ownership. There are first home and home loan grants, LMI and duty concessions. Your choices widened recently with the Australian government introducing the 2021 First Home Loan Deposit Scheme.

Help for first time buyers

There are a range of schemes to help borrowers buy their first home.

  • First Home Loan Deposit Scheme (FHLDS). This is a federal government initiative that underwrites home loans for first home buyers. The recently announced scheme has 10,000 spots for approved applicants to get a mortgage with a deposit of just 5% and avoid paying for LMI. The scheme is open from 1 July 2021 to 30 June 2022.
    FHLDS allows borrowers to avoid paying for LMI if they are unable to get a guarantor for their home loan. Details are available at the National Housing and Investment Corporation.
  • Family Home Guarantee (FGH) helps single parents with at least one dependent get a home loan with as little as a 2% deposit. Single parents are eligible whether they are first home buyers or previous home owners. There are 10,000 FHG spots available from 1 July 2021 to 30 June 2025.
  • First Home Owner Grant (FHOG): Depending on where you live and whether you plan to buy an existing or newly-built home, you may be able to get a grant of between $10,000 and $16,000 offered by state and territory governments. A successful applicant can add the grant to existing savings to meet the lender deposit amount. Check your state's details at firsthome.gov.au.
  • First Home Super Saver Scheme (FHSSS) allows first home buyers to save for a home deposit through their superannuation. You can make up to $15,000 of tax-deductible voluntary super contributions every year towards your deposit. Find out how to use your super to buy a house. Details and recent changes to the FHSSS can be found at ATO's First home super saver scheme page.
  • LMI duty and other stamp duty concessions: Some states have concessions for first home owners, on the stamp duty payable on property transfer. Check with your state or territory Revenue Office or Treasury Department web pages:
  • There are also various home ownership support initiatives for:

Learn about 5% deposit home loans

Commonly asked questions with answers.

  • FAQs

How can I compare low deposit home loans?

Here are a few things to consider when you look at 5% deposit home loans:

  • Interest rate is a key factor in loan comparisons. If you get a loan with low interest rates, it is more affordable and you will have lower repayments. You want to compare the most competitive interest rates available and then also consider the other factors given below.
  • Fixed or variable interest rates is another choice you can make. Fixed rate loans have more certainty because you can budget your repayment amounts for the fixed rate period, but they come with less flexibility. Your lender may change the variable rates up or down with RBA rate movements, so you can never know when repayment amounts may change. Variable rate home loans typically have more features and are less costly to refinance.
  • LVR matters even more than usual if you haven't saved the 20% deposit.
  • Loan type and repayments. Depending on whether you are seeking a home to live in or an investment property, you may get the option of repaying on principal and interest basis or interest-only for the loan period.
  • Payment period. You may be able to pick anything between 5 years to 30 years to pay off your home loan.
  • Loan fees come in a variety of types. There may be application fees, ongoing monthly account keeping fees, and annual package fees. There may be other fees for early repayment, redraw, and offset facilities as well as penalties for delayed payments and discharge fees for early pay off. All of these can add up to increase the total cost of your loan. You need to make sure that a low interest rate is not negated by excessive fees.
  • Loan features. Some home loans come with offset accounts that let you make extra repayments. There are redraw facilities and the ability to split your loan into fixed and variable elements. Such features help you manage your personal funds more effectively, pay less interest and to pay off your home loan faster.
  • The lender. Your choice of lender is important. Depending on their credit policies, more conservative bank lenders may not be open to small deposit borrowers. Often non-bank lenders are more willing to work with low deposit borrowers and may be flexible in their terms as well as eligibility requirements. Regardless of how attractive their offers are, check whether your lender is regulated under the Australian Securities and Investment Commission (ASIC) to ensure your safety. See what you must check about the lender before borrowing, including whether or not they are on the ASIC professional register.

You need to consider all of these factors when choosing a 5% deposit home loan. Do your research on lenders with loan criteria that suit your needs. An easier option is to work with a mortgage broker who may be able to find the best and the most favourable deals for you with lower LMI costs or waivers.

How can I ensure my home loan application will be approved?

If you have only saved up to 5% for the home loan deposit, this narrows your choice of lender already. Lenders want to minimise the risk that you may be unable to pay off the loan. Here’s what to consider when getting ready to apply for a low deposit home loan.

  • A complete and strong loan application. You want to avoid being rejected because it reflects badly on your credit report. Make your application strong so that it leaves a good impression of you as a responsible lender with organised finances.
  • Avoid excessive spending. High credit card debts, low savings levels, and evidence of splurging on clothes, gadgets, expensive food and other spending in bank statements raises questions about your spending habits, financial responsibility and ability to repay the home loan each month. Find out more about HEM expenses.
  • Know your credit score. Most banks have a minimum required credit score for a home loan. You can strengthen chances of loan approval with a strong credit score and by sorting out any issues with your credit history.
  • The location and property type matters. Check lender credit policies on this. Some lenders have higher requirements for apartment purchases and preferences for certain postcodes and areas. Choosing the wrong type or location may mean you would be having to find a 20% or even 30% deposit.
  • Your employment history.
    • A lot of job changes can signal danger to lenders about your financial stability and ability to repay the loan.
    • Those who have permanent jobs are more likely to be eligible with smaller deposits while those in casual jobs find it tougher to get approved.
    • If you have been with the same employer for a few years, that shows stability. If you have moved recently, and are in a new job, some lenders may reject you just for that. Others may be flexible.
    • Lender policies on self-employed people vary, but most would ask for two years of tax documents. If you cannot provide this proof, because you started recently, you may opt for a low doc home loan.
  • Your field of work can make a difference. Some preferred groups also can get special waivers on LMI even with smaller deposits because they are considered low-risk borrowers. Check out our home loan pages for:
  • Your debts and spending record matter too. You can strengthen your home loan application by paying down credit cards and lowering credit limits to avoid excessive spending again. Plan to reduce your spending as much as you possibly can for a few months before applying for a low deposit home loan. (This does not mean you should splurge once your loan is approved.)
  • Consider working with a mortgage broker. You want to find a mortgage broker who is experienced in small deposit home loans. Since they work with many lenders, a broker can help you identify those who are most open to low deposit borrowers and have flexible eligibility requirements to suit your personal and financial circumstances.

What other costs are there when buying a first home?

Your costs amount to a lot more than the deposit. When you are saving money and planning to get a home loan, you need to plan for these costs as well. There are upfront costs and ongoing costs. Stamp duty, conveyancing fees, council rates, and removalists are just some of them. But there may be ways to save on some of these expenses as well, with government concessions, if you qualify.

What type of deposit do I need?

The type of deposit and value accepted as minimum deposit depends on the lender. Some lenders want proof of genuine savings, which have been in your accounts for three months. Others may accept gift deposits and other non genuine deposits.

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