Low Deposit Home Loans - Harvest Financial Group

Interest rate announcement – May 2021
The RBA last changed the cash rate in November last year, reducing it to an unprecedented low of 0.1%. This was an unprecedented move from the RBA which reveals that, while the economy has begun to bounce back, the path to full recovery from impacts of COVID-19 is likely to be extended well into next year at least. This month, RBA left the rate on hold at this level and reaffirmed its commitment to continue to help support the economy through this recovery phase.

Low deposit home loans can help you buy a property without having to save a full 20% deposit. You can have loan to value ratios (LVRs) of 90-95%, meaning you borrow 90-95% of the property’s value, and you pay a deposit of 5-10%. In some cities, like Sydney and Melbourne, a 20% deposit can be a six-figure sum, so a low deposit loan can help you get on the property ladder sooner.

Low deposit home loans often come with higher interest rates, and with the extra cost of lenders mortgage insurance (LMI), which can amount to several thousands of dollars. Lenders may also scrutinise your loan application more carefully, which we’ll explain in more detail below.

Here’s everything you need to know about low deposit home loans and how to apply for a loan that gets you on the property ladder sooner.

What is a low deposit home loan?

Most Australian home loans require a 20% deposit. If your deposit is less than 20% of the property’s purchase price plus costs, you will need to apply for a low deposit home loan. In the past, it was possible to get a no deposit home loan, although they are no longer offered.

Low deposit home loans are exactly the same as other home loans, but they may have slightly higher interest rates to compensate for the fact that the bank is taking on a higher risk when accepting your loan.

Borrowers who take out low deposit home loans generally have to pay lenders mortgage insurance (LMI), although there are ways to avoid it – more on that soon.

Loan to value ratio, or LVR, is home loan jargon for minimum deposit size. Most home loans have maximum LVRs of 80%, which means you need to provide 20% of the property purchase price plus costs, as a deposit. But home loans also have a maximum insured LVR, which can be 80% or higher.

If a home loan has a maximum insured LVR of 90% or 95%, then it’s a low deposit home loan.

Here’s a simple breakdown:

A loan has a maximum LVR of 80% and a maximum insured LVR of 80%. You need a 20% deposit plus all associated costs. This loan is not a low deposit home loan.

Can I get a home loan with a 5% deposit?

Yes, it is possible to get a home loan with as little as just 5% deposit saved.
You can secure a home loan with a 5% deposit, plus stamp duty and other costs associated with property buying, but you will be required to pay Lender’s Mortgage Insurance (LMI).

The cost of LMI will vary depending on the size of your deposit and the purchase price of the property you’re buying.

First home buyers who meet the eligibility criteria may also be able to secure a home loan with a 5% deposit without paying LMI, thanks to the government’s First Home Loan Deposit Scheme (FHLDS). There are 10,000 places available under the scheme each financial year.

What is lenders mortgage insurance?

If you buy a property with a small deposit, your lender views you as a higher risk borrower. This means you have to pay an LMI premium when you get the loan.

Even though you are the one paying the premium, lenders mortgage insurance does not protect you as a borrower. It protects your lender in the event that you can’t repay your loan. Essentially, you are taking out this insurance to reassure the bank that if you can’t repay the loan for any reason, insurance will kick in and the lender won’t be left out of pocket.

LMI premiums vary depending on your deposit size, property value and loan amount. It can add thousands or even tens of thousands to your loan.

For example, a $600,000 loan with a $60,000 (10%) deposit could generate an LMI premium of around $13,000. Understandably, LMI is one of the biggest costs of buying a property that low deposit borrowers need to budget for.

Can I get a low deposit mortgage and avoid paying LMI?

If you have a parental guarantor to guarantee part of your deposit you can get a low deposit home loan while avoiding LMI.

Eligible first home buyers may also be able to borrow 95% of their home’s value under the First Home Loan Deposit Scheme. In this scheme, the federal government acts like a guarantor, in partnership with specific lenders, and the borrower can avoid paying LMI premiums. The cost savings here can be significant and help you buy your own home sooner.