Low deposit home loans

When you’re struggling to save up for a home loan deposit, it can sometimes feel as if your dream is going to be forever out of your reach. But help is at hand. Finty has some advice about how to get into the housing market with a low deposit, and a range of low deposit home loans to suit your budget.

By   |   Verified by David Boyd   |   Updated 2nd December 2020

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

Loans.com.au ZIP Home Loan (Owner, Principal and Interest)

On loans.com.au's website

Loans.com.au ZIP Home Loan (Owner, Principal and Interest)

Interest rate (p.a.)

2.73%

Comp rate^ (p.a.)

2.75%

Max LVR

80.00%

Application fee

$0.00

Monthly repayment

$1,832.32

Total repayment

$659,635.20

Highlights

  • ZIP Home Loan is a super-low-rate home loan that comes with a $5,000 limit Visa Debit Card that is interest-free.
  • Save further with the $0 ongoing fees.
  • Make unlimited additional repayments and free redraws.
Reduce Home Loans Home Owners Dream Fixed - 3 Year Fixed LVR 90% (Owner, Principal and Interest)

Reduce Home Loans Home Owners Dream Fixed - 3 Year Fixed LVR 90% (Owner, Principal and Interest)

Interest rate (p.a.)

2.09%

Comp rate^ (p.a.)

2.64%

Max LVR

90.00%

Application fee

$0.00

Monthly repayment

$1,683.61

Total repayment

$606,099.60

Highlights

  • No ongoing annual or monthly fees!

Overview

If you cannot save enough money for a 20% deposit when you're buying a home, you are going to be searching for low deposit home loans. Many Australian home loan lenders will only approve standard home loans where applicants have a 20% deposit, but it doesn't mean that you can't get home loans with low deposit savings. There are plenty of ways to boost your deposit so that it reaches the lender's requirements, or to meet extra conditions so that your loan is approved despite your low deposit.

A good credit rating will help you with low deposit home loans

It's important to understand that a good credit rating is one of the best tools available to low deposit borrowers. A good credit score assures the lender that you are financially disciplined and are likely to do everything you can to keep up with your loan repayments. It won't guarantee you a loan, but it will help to tip the scales in your favour.

Your credit score is a numerical expression of the data in your credit report, the history of your financial behaviour as an individual collected by Australia's three credit reporting agencies. The lender is certain to check your credit rating when you apply for a loan, so get in ahead of the game and check your score yourself, free of charge.

LVR and the 20% deposit preference

When you apply for a home loan with a specific property in mind, the lender will almost certainly have the property valued by a professional valuer. This allows the lender to work out the maximum loan amount they are prepared to extend, secured against the property. Lenders prefer a maximum Loan-to-Valuation Ratio (LVR) of not more than 80%.

What this means is that, if you were looking to buy a home for $1,000,000, and the valuer agrees that it is in fact worth $1,000,000, the lender's maximum loan amount would be $800,000, and you would have to provide a 20% deposit of $200,000. But if the valuer thought that the property was worth only $900,000, the maximum loan amount (with no extra security or insurance attached) would be only $720,000, and you would have to find a deposit of $280,000.

Banks like to have this 20% margin of comfort in case of problems with the loan, such as the borrower not being able to keep up with repayments and defaulting, or ending up with negative equity (owing more to the lender than the property is worth). They need to protect themselves against dips in property prices, which, although they are usually short-term, could see them losing money if they need to repossess a property in the early years of a loan's term. Lenders are also obliged to do their best to make sure you will be able to afford your monthly repayments when approving a loan, and a bigger deposit will certainly make the repayments more affordable.

Ways to boost your deposit to 20%

In the current low interest rate environment there are no true high-interest savings accounts to make your deposit grow quickly by adding interest earned. So, you need to consider these alternative methods to make that deposit grow.

Boost your deposit by using your super

The ATO will give you concessional tax treatment if you save for your first home deposit by making pre-tax contributions to your superannuation fund. This means that you will be able to save faster, and when you need the funds for a home loan deposit you can apply to have them released, up to a maximum of $30,000. You can also make after-tax, non-concessional contributions.

See the details at First Home Super Saver Scheme. We recommend consulting an accountant before you decide to use this method.

Boost your deposit with the First Home Owner's Grant

You can take advantage of a First Home Owner Grant (FHOG) available from most states and territories. The most generous cash grants are for new builds (up to $25,000) rather than existing homes. Many states also have stamp duty concessions for property title transfers when you're buying a home for the first time, meaning that you can put more of your savings towards a loan deposit rather than setting money aside to pay stamp duty. See details at firsthome.gov.au and, for New South Wales, at First home buyer grant and assistance.

Boost your deposit with a gifted deposit

If you're really fortunate, a close family member (again, usually a parent) may be able to give you a lump sum that will swell your deposit to the 20% required. There's more to this than having the bank of Mum and Dad just hand over the cash. There are qualifications and conditions to meet, and pros and cons to consider. We strongly suggest you read our guide to gifted deposits.

Ways to avoid the 20% deposit requirement

If you still can't reach that magic 20%, even by considering saving in your super fund or by applying for a First Home Owner Grant, there are still several ways to get approved for low deposit home loans.

Loan guarantor

Asking a family member (usually one or both of your parents) to guarantee a part of your loan is a popular way to get loan approval with a low deposit. Your parent(s) will need to own their own home (located in Australia), or have a substantial equity in it, because the lender will want to use their property, or a part of it, as extra security for your loan. If your guarantor can cover enough of your loan, you won't have to pay for Lenders Mortgage Insurance (see below).

Here's how it works. Let's say you want to buy a $750,000 property but have saved up only $100,000 as a deposit so far. You're $50,000 short of the lender's 20% deposit requirement of $150,000. Your parent could offer to guarantee $50,000 of your loan by offering their own property as security, and the lender will want to take possession of their title deed and put a charge on it for that amount. Once you have achieved 20% equity in your home (by making loan repayments and/or because property prices have increased) you can apply to have the charge removed and the title deed for their property returned to your guarantor.

Becoming a loan guarantor is a big step, because a guarantor puts their own property in the firing line for repossession if the borrower they are guaranteeing is unable to keep up with loan repayments, and if they can't cover the amount owing themselves. Most lenders insist on prospective guarantors getting legal advice before signing a loan guarantee.

More details are available in our guide to guarantor home loans.

Lenders Mortgage Insurance

If a loan guarantor is not an option for you, you can still qualify for low deposit home loans. If you can demonstrate a history of saving for a deposit, and you have a good credit score and an income high enough to meet your loan repayments, many lenders will approve your loan if you agree to pay for Lenders Mortgage Insurance (LMI).

This is an insurance policy that protects not you, but the lender, if you fail to meet your loan repayments and they find it necessary to repossess your home in order to recover their costs. If your equity in the home is less than 20% (as a result of your low deposit) there's a good chance they may not be able to recover all their costs, and they will be able to make a claim against the LMI policy.

LMI is not cheap, but you can often have the cost added to your loan, so that you pay it off over the life of your loan. You can find out more about it in our Lenders Mortgage Insurance guide.

First Home Loan Deposit Scheme

The federal government will act as guarantor for up to 15% of the deposit for loans for a limited number of first home buyers, removing the need to pay for LMI, under the First Home Loan Deposit Scheme (FHLDS). The 2020-21 federal budget made an additional 10,000 places available under this scheme, specifically for first home buyers intending to purchase or build a new property.

Learn about low deposit home loans

Find out what to consider before applying for a home loan with a high LVR.

  • Pros & cons

  • Tips

  • FAQs

A low deposit usually means higher monthly repayments

There are many factors contributing to the size of your monthly home loan repayments. The price of the property you purchase, the interest rate and the loan term are the main ones, but the size of your deposit also has a big impact. Given the same property price, interest rate and loan term, your monthly repayments are obviously going to be higher if you have only a 5% deposit when compared with a 20% deposit. Your lender is obliged to be satisfied that you can meet the repayments before approving the loan, but don't just leave it to the lender. You are the one best fitted to make this decision, and it's never a good idea to take on a loan you know you can't afford to repay.

Buying sooner could be a good investment

Although there's no guarantee that house prices in Australia will continue to increase by the 7.25% average growth seen over the past 30 years, investing in your own home is considered one of the safest bets there is over the long term. But it's the first step – getting onto the property ladder – that is the hardest, and it can often feel as if you are chasing a target that is moving further away with every year that passes. So, taking out a home loan with a low deposit could be a good idea if it means that you can take that first step, rather than waiting until you have saved a 20% deposit and watching house prices increase beyond your reach.

Having a loan guarantor can be a successful way to get a low deposit loan

If your parents are willing and able to act as guarantors for your loan, and you have every intention to meet every single loan repayment on time (with an income high enough to back up your good intentions), a loan guarantor can be a painless way to get your loan approved and save money by avoiding Lenders Mortgage Insurance.

Having a loan guarantor can put the guarantor's property at risk

Guaranteeing someone else's loan is not something to be undertaken lightly. The guarantor will need to offer their own property as extra security on the loan. If the borrower defaults on the loan, then has the property on which the loan is primarily secured repossessed and sold, and the sale price fails to cover all the lender's costs, the guarantor will be pursued to cover the remaining balance. In the worst case scenario, the guarantor could risk having their own property repossessed and sold.

There's lots of help available

There's plenty of help for borrowers with a low deposit looking to buy their first home. Lenders do their best by offering the Lenders Mortgage Insurance option, while federal and state governments are bending over backwards to help with grants, loan guarantees and stamp duty and other concessions.

Explore all your options for getting approved with a low deposit

Will one or both of your parents agree to act as your loan guarantor? If all parties understand the implications, and you keep up with your loan repayments, this can be a fairly painless way of getting onto the property ladder.

If there's no prospect of a family guarantor, you could qualify to have your loan guaranteed by the federal government. You stand a better chance if you're buying a new home rather than an existing one.

And if all other options fail, you can still pay for Lenders Mortgage Insurance.

Explore all your options for increasing your deposit

Even if your deposit is low, the more cash you have, the more loan options you will have, with better interest rates and conditions.

Will your parents gift a part of your deposit? You'll never know if you don't ask.

Can you qualify for a First Home Owner Grant? Checking the eligibility requirements will tell you.

Could you save for a deposit faster using superannuation contribution tax concessions? It may look complicated, but your accountant will be able to help you.

Get your credit score sorted

Before you start to apply for a home loan with a low deposit, make sure your credit rating is in the best condition it can be. Here are some things you can do to improve your credit score:

  • Aim to always pay bills on time
  • Don't make too many applications for credit, such as credit cards and personal loans
  • Try to repay your credit card balance in full each month
  • Pay off or reduce any outstanding debts
  • Diversify your credit by aiming for a mix of a credit card, a personal or car loan, and a post-paid mobile phone contract
  • Maintain credit accounts, such as credit cards, in good condition over the long term, rather than closing them down
  • Continue to monitor your credit score

Look for a lender with an Australian Credit Licence

Protect yourself by only borrowing from a lender who has an Australian Credit Licence. All banks, building societies, credit unions and finance companies should have an Australian Credit Licence, and financial advisors, finance brokers and mortgage brokers need them as well. Finty is a credit licensee. You can check the ASIC professional register to find out if a lending organisation or advisor is properly licensed.

You don't need to accept less than the best just because your deposit is low

While you'll certainly have more bargaining power with a 20% deposit than you would with a 5% deposit, it doesn't mean that you should accept the first home loans with low deposit you are offered. By all means check out what your regular bank has to offer, but don't hesitate to compare that loan with all the products offered by the many other lenders who are competing for your business. Aim for the best combination of:

  • Lowest advertised interest rate
  • Lowest comparison interest rate (i.e. effective rate including unavoidable fees)
  • Lowest fees not included in the comparison rate
  • Choice of loan terms
  • Availability of offset account, extra repayment facility, redraw facility

The easiest way to compare your home loan options is to do comprehensive research online.

Can I add the cost of property transfer stamp duty to my loan?

A lender may agree to this only if you have a loan guarantor.

Can I boost my low deposit by using my superannuation?

Yes. You may be able to save for your home deposit within your superannuation fund, obtaining concessional tax treatment to help you save faster, and then applying to have the funds released when you are ready to buy. It’s quite complicated so you may need to get advice from an accountant, but you can see the details at the ATO’s First Home Super Saver Scheme page.

Can I boost my low deposit with a First Home Owner’s Grant (FHOG)?

Yes. Most Australian states and territories currently have cash grants available to first home buyers, as well as stamp duty concessions. Eligibility, conditions and amounts vary from state to state, but you can see the details for your area at firsthome.gov.au and, for New South Wales, at First home buyer grant and assistance.

It’s a great option for boosting your deposit and avoiding LMI, but in most states and territories you will need to buy a new home rather than an established property in order to qualify.

Can I get a home loan with no deposit?

This is extremely unlikely, given the tightening of government rules for lenders when assessing a borrower's ability to repay the loan. And even if you were able to secure a loan with no deposit, you would probably be paying interest rates much higher than the standard rates normally offered.

What are the extra conditions I have to meet before I can be approved for a low deposit home loan?

First of all, you need to be realistic about what you can afford. If you have saved a deposit of $25,000 there’s not much point in looking at properties advertised at $600,000, or with an indicated price in that range. A home valued at around $500,000 is probably going to be the maximum you can get a loan for, because you only have a 5% deposit, and even then you’re going to have to jump through a few extra hoops. Also bear in mind that the lower your deposit, the higher your periodic repayments are going to be, and you need to budget for them.

Then, you need to tick several boxes to secure a low deposit home loan:

  • Good credit rating. The better your credit rating is, the more chance you stand of being favourably regarded by a lender. So during the time you are saving for a deposit, also work on making your credit score as high as possible. We have some tips on how to improve your credit score.
  • Extra cash for upfront costs. Don’t forget that there are other costs associated with buying a property, in addition to the purchase price. You’ll need to pay state government stamp duty (which could amount to many thousands of dollars) on the property title transfer. It’s a good idea to have a building structure and pest inspection done by experts before you commit to buy a property. A solicitor or conveyancer will be needed to deal with preparing the sale contract and handling the purchase settlement process. And when you move in you’ll need to allow for removal costs, even if you don’t have much furniture and intend to DIY the removal.
  • First Home Loan Deposit Scheme(FHLDS), Loan guarantor or Lenders’ Mortgage Insurance (LMI). Because you have only a small deposit, the lender will not be satisfied with just the purchased property itself as security for the loan. If you were to default on your loan repayments to the extent that the lender needed to repossess the property and sell it, there would be a risk that the sale price would not cover 100% of the loan principal and the lender’s additional costs. So the lender will look for extra security, which could take one of three possible forms: an additional loan guarantor, or a Lenders’ Mortgage Insurance (LMI) policy, or a loan guarantee provided by the federal government's First Home Loan Deposit Scheme.

What is a loan guarantor?

A loan guarantor, in the context of a low deposit home loan, is usually a close family member (very likely one or both of the intending borrower’s parents) who is prepared to offer as additional loan security a property they own outright, or have substantial equity in. The lender will usually take possession of the guarantor’s property title deed, and put on it a charge for the required amount of security.

For example, the likely charge against the guarantor’s title would be $75,000 for a loan against a property valued at $500,000 where the borrower had only a $25,000 deposit. This charge would remain on the loan guarantor’s property title deed until the principal of the loan they were guaranteeing fell below $400,000, as a result of the borrower’s repayments. At this point the borrower and guarantor could request the removal of the charge and the return of the now unencumbered title deed.

Guaranteeing a low deposit home loan is not something to be undertaken lightly, since there is a risk of substantial financial loss if the borrower defaults on the loan, but it is something that many parents are prepared to do for their children.

What is a low deposit home loan?

It’s a home loan where the lender is advancing more than 80% of the property’s value as calculated by a professional valuer.

Many lenders have a strict policy about how much borrowers will need by way of a deposit before they will be approved for a home loan. The amount of deposit needed is usually calculated as a percentage of the lender’s assessment of the value of the property the borrower wishes to purchase. So rather than being a fixed dollar value, the deposit you need will vary depending on the value of the property you are hoping to purchase.

For example, many lenders will require hopeful borrowers to have a 20% deposit. Another way of expressing this is that lenders require a loan-to-value ratio or loan-to-valuation ratio (LVR) of 80% or less. This simply means that, if you are hoping to purchase a property valued at, say, $500,000, you stand a much better chance of being approved for a loan if you have a $100,000 cash deposit and only need to borrow $400,000 (80% of the property’s value).

However, just because many lenders prefer a 20% deposit, it doesn’t mean that you can’t get a loan with a smaller deposit. Some lenders will be prepared to give you a loan if you have a 10% or even only a 5% deposit. You just need to meet some extra conditions, which may mean having a loan guarantor, or paying for Lenders Mortgage Insurance, or being approved to participate in the federal government's First Home Loan Deposit Scheme.

What is Lenders’ Mortgage Insurance (LMI)?

Lenders’ Mortgage Insurance is a policy which protects the lender against loss if the borrower defaults on the loan. If your deposit is less than 20% of the property’s value, and you do not have a loan guarantor, the lender is likely to insist on this insurance policy. Although the policy is designed to protect the lender – not the borrower – against loss, it is the borrower who has to pay the substantial premium cost, which may be more than $10,000. However, many lenders will agree to add the premium cost to the loan amount, so that it can be repaid gradually over the term of the loan.

What is the First Home Loan Deposit Scheme (FHLDS)?

Following legislation which came into effect on 1st January 2020, the federal government will act as loan guarantor for a limited number of low deposit home loans each year. An additional 10,000 places specifically for newly-built properties were made available in the 2020-21 federal budget. The scheme is only available to first-time buyers, and there are eligibility limits depending on the borrowers’ income, age, and the property price. Find out more at the National Housing Finance and Investment Corporation (NHFIC).

What is the lowest deposit home loan I can have?

If you can qualify for the First Home Loan Deposit Scheme or have a loan guarantor, you can get away with as little as a 5% deposit, possibly even less. You may even be able to find a rare lender prepared to loan 95% of the property value on the basis of LMI alone, but make sure that you can afford the higher loan repayments which are the inevitable result of a low deposit.