Buying a home is expensive - that’s the unfortunate reality. And saving up for a 20% deposit to actually buy a home can be a whole other difficult task in itself. A 20% deposit often equals tens of thousands of dollars, if not more. For example, if you wanted to buy a $750,000 home, you’d need at least $150,000 readily available for the deposit to meet the 20% mark. That is a LOT of money. Money that would take most of us years and years to save.

But, it’s not all doom and gloom.

If you are a first home buyer ready to get into the property market, there are ways around a 20% deposit. Many lenders offer low deposit home loan that only require a 15% or even 10% deposit.

The key benefits for taking out a low-deposit home loan include less time taken to save, and your ability to get your foot on the property ladder sooner. However there’s some considerations to make first.

Here’s how a low deposit home loan works.

What is a low deposit or 90-95% LVR home loan?

When applying for a home loan, the standard deposit is 20% - anything below this is typically regarded as a ‘low deposit.’ While securing a loan with a small deposit means saving less and getting into the market sooner (benefits), it also means borrowing more and coughing up extra cash to pay lenders mortgage insurance (LMI).

LMI is an insurance policy designed to protect the lender in the case the borrower defaults on their home loan repayments. While LMI premiums vary depending on your deposit size, property value, and loan amount, you can generally expect it to add thousands of dollars to your purchasing costs. For instance, a first home buyer purchasing a $600,000 property with a 10% deposit (90% LVR) would need to fork out approximately $9,800 in LMI costs.

If you’re looking for information on 5% deposit home loans, head to: Which lenders offer 5% deposit home loans in Australia?

Steps to getting a low-deposit home loan

1. Lenders mortgage insurance (LMI)

Banks and lenders offering low deposit home loans of as little as 5% typically require borrowers to pay lenders mortgage insurance (LMI). This insurance protects the lender in the likelihood that you may default on your mortgage repayments. LMI is typically underwritten by insurance giants QBE and Genworth, now called Helia.

If you were to default on your mortgage, LMI means the lender can recover what is owed to them by repossessing the property attached to the home loan. Typically, LMI is bundled into the balance of the home loan, which means an increase to the amount of mortgage repayments. To reduce the potential sting, making additional home loan repayments can avoid potentially being caught in a sticky financial situation.

2. Utilising Government schemes

To avoid paying LMI, there are a number of government incentives available for aspiring property owners to achieve their new home goals.

The Home Guarantee Scheme provided by the Australian Government through the National Housing Finance and Investment Corporation (NHFIC) offers the First Home Guarantee, Regional First Home Buyer Guarantee and Family Home Guarantee.

While the three schemes may not a cash incentive for potential first home buyers, they allow first home buyers to purchase a home with a deposit of as little as 2% without being charged LMI.

3. Appoint a guarantor

If you want to try to avoid paying LMI, another option is to ask a relative to act as a guarantor for your home loan. This means the guarantor agrees to take on responsibility for either covering the deposit or for taking over the monthly mortgage repayments for the foreseeable future if you're unable to meet your repayments due to a change in circumstance.

It's a huge ask, admittedly, and the guarantor is taking on risks. So your guarantor can't be just anyone.

It's important to note not just anyone can be a successful guarantor. Your bank or lender will want to take a deep dive into their finances, credit profile and employment to ensure they can cover your payments or fund the loan if you default. Typically, appointing a guarantor will require having to undergo a similar application or verification process to when you first applied for a home loan.

4. Show good money management

Your lender will want to see evidence of your ability to service the loan and will do so by looking at your income, assets and liabilities, bank statements and credit score and history. All these factors come into play as the bank or lender determines whether you will be able to service a mortgage.

If you can point out good behaviour like your deposit savings campaign, or taking on overtime or a side gig to boost your income, then your lender is more likely to view you favourably.

5. Be a doctor, engineer, or other 'esteemed' profession

Many lenders waive LMI - especially if you have a 10% deposit - if you or your spouse is a doctor, engineer, or in a stable and well-paid field - especially in the medical field. This includes GPs, dentists, surgeons, optometrists, vets and so on, however it typically doesn't include nurses. Some lenders might also allow these professionals to borrow 100% of the property value.

Is a low deposit home loan the right option?

Saving for a 20% deposit can be a slog, and if you’re eager to get into the market, a low deposit home loan could be worth it. Or, if you’re willing to wait and save a 20% deposit, this could be worthwhile too.

Here are some of the benefits and drawbacks to weigh up if you’re considering a low deposit home loan.

Enter the market sooner

Domain research revealed it can take first home buyers more than 10 years to save up a 20% deposit for a modest home in the capital cities.

A low deposit home loan cuts down the time you need to save up for a new home, and for first home buyers who are ready to stop renting or living with mum and dad, it can be the right segue onto the property ladder.

Begin building equity

The sooner you get into the market, the sooner you start paying off your mortgage and building up equity (especially if property prices are rising fast).

Once you have at least 20% equity, you could then refinance to a more competitive home loan with lower interest rates or more/better features.

Larger debt overall

The smaller your deposit, the larger your debt, the more you have to pay back to your lender, and the longer you have the debt. Simple.

Likely pay LMI

If you don’t end up qualifying for the available government incentives, and have a deposit less than 20%, you will generally have to pay for LMI. Which as you now know, can be thousands of dollars.

Low deposit loan could end up more expensive

Since you’re borrowing more, you could be seen as a ‘riskier’ borrower. This could lead to higher interest rates and therefore higher monthly loan repayments.

Below is an example of two homes loans with identical interest rates based on a $600,000 property and a 30-year loan term. The only difference is the deposit size - you can see how this changes your repayments.

The difference in monthly repayments between the low deposit and full deposit loan is $359.

Over the life of the loan, this adds up to $59,503 in extra interest payments.

Tips to help get approved for a low-deposit home loan

• Ensure your application paperwork is correct
• Check your credit history - obtain a copy of your credit report and check for any errors or discrepancies. Then, start paying off any existing debts, make timely bill payments, and cancel any unnecessary credit cards.
• Keep track of your spending - take control of your everyday spending and eliminate any unnecessary purchases e.g. buy now pay later and other debts. Lenders will likely want to see three months' worth of bank statements and a demonstrated history of real savings.
• Check what type of property you’re buying and where - some lenders impose higher lending requirements and restrictions on certain property types in certain postcodes. They may require a 20% deposit.
• Speak to a mortgage broker - can guide you through how a low deposit home loan works, the different loan products at your disposal, and your deposit options.