Mortgages

Yard Guide: Is a low deposit home loan right for you?

Toni Mladenova
May 21, 2021
Yard Financial Pty Ltd | ACN 623 357 513 | Australian Credit Licence 509481

Table of Contents

Saving for a deposit is one of the biggest challenges of getting into the property market, which is why you should consider a low deposit home loan or 5% deposit home loan. 

Even though lenders like to see a deposit of at least 20% of a property’s purchase price, you can still get a foot on the property ladder with a much smaller deposit. This is good news if you are a first-time home buyer or on a tight budget as you could still qualify for a low deposit home loan. The obvious advantage is that you will be able to enter the property market immediately, and not miss out on living in your dream home. 

This guide will explain what a low deposit loan is, weigh up the pros and cons, and answer the most common questions about it.  You can then make an informed decision if it is right for you. 

Let’s start by explaining - in plain English - what a low deposit home loan is.

What is a low deposit home loan?

A low deposit home loan is when your lender is prepared to accept a deposit of less than 20% cent of the value of the property. They are also known as High LVR (Loan to Value Ratio) loans, where the initial deposit can range from 5% to 19%. 

Low deposit home loans are popular with first-home buyers and people on tight budgets who may be struggling to save for a larger home deposit. Your home loan deposit is the initial sum you put down to secure a loan with a lender. It shows them you are able to save, gives them some security and reduces their risk.

While larger deposits give you more leverage and may even get you a reduced interest rate, they are not compulsory. In reality lenders will accept a deposit of anywhere from 5% to 19%. This does mean you may have to pay Lenders Mortgage Insurance (LMI) - which applies to loans where you are borrowing more than 80% of the total value of a property. 

What is LVR?

The loan to value ratio (LVR) is a calculation lenders use when assessing your loan application.

LVR is calculated by dividing the amount of your home loan by the purchase price or appraised value of the property. LVR is closely related to the size of your deposit, so a loan with an LVR of 80% will typically require a deposit of 20%. The lower the LVR, the lower the risk to the lender. 

Low deposit loans are generally for more than 80% of the value of the property, which means you will have to pay Lenders Mortgage Insurance (LMI). 

Yard can go up to 95% LVR for owner occupiers and 90% LVR for investors, including capitalised LMI.

Understanding Lenders Mortgage Insurance (LMI)

Lenders mortgage insurance (LMI) protects your lender in case you can no longer make the repayments on your loan. If you have a smaller deposit - like a low deposit loan - then you need to budget for this extra cost.

If you want an idea of how much the LMI could be on your home loan, use an online tool for an indication of the LMI premium payable.

Case Study: How a low deposit home loan works in the real world

In this real world example we are assuming you:

  • You want to purchase a property with a value of $500,000
  • You have saved a deposit of $50,000, which is a 10% deposit
  • You therefore require a loan of $450,000

The loan to value ratio (LVR) is therefore 90%.

Based on this you would be paying Lenders Mortgage Insurance (LMI) premium of $8,679.89 (excluding stamp duty).

Some lenders also allow you to add the cost of LMI onto the loan - or capitalise the LMI, so you avoid having to pay this cost upfront. In this example your total loan amount would increase to $458,680.

*This example is based on a loan term of up to 30 years, for a first home buyer who is an owner occupier in NSW. LMI premium calculated based on Genworth LMI premium calculator.

Securing a low deposit loan: the advantages

There are upsides and downsides to everything, including financial products such as low deposit loans. The obvious pros and advantages of securing a low deposit loan from a lender means you:

Get into the property market sooner

If you want to get a foot on the property ladder and secure a property before house prices inch ever higher, then qualifying for a low deposit loan enables you to do this immediately. This could save you years of paying rent and saving for a much larger deposit - while property prices could be rising. 

Don’t waste money on rent

If you are renting, your weekly rent payment is going to a landlord, when it could be making a mortgage repayment. A low deposit loan enables you to become a property owner and benefit from the appreciation of your asset - otherwise known as capital growth. 

Start creating wealth and building equity in your home

Property is recognised as a reliable investment vehicle for achieving capital growth over the medium/long term. A low deposit loan could be your entry to this world, so you can start creating wealth and building equity in your home. You do of course have to do your homework and invest in a property with the potential for capital growth.  

Are there cons to a low deposit loan?

Like any investment you also need to be aware of all other considerations before you apply for a low deposit loan. Conditions to be aware of with this type of loan include:

Higher interest rate

If you qualify for a low deposit loan be aware that you are likely to be paying a higher interest rate than a standard home loan. This is because the lender is receiving a lower initial deposit from you. A higher interest rate means you will be paying higher weekly/monthly repayments than a standard home loan. 

You need to pay LMI

Lenders mortgage insurance (LMI) is likely to apply for anyone with less than a 20% deposit. You need to work out if this is worth it, bearing in mind your deposit is lower - but you will have the extra cost of LMI to pay back over time.

Higher loan amount

Paying a smaller deposit also means your loan will be for a larger amount, so you are likely to take longer to pay it off. In terms of a timeframe, this could translate into years of repayments.

More stringent lending requirements by lenders

Lenders are likely to be more stringent when it comes to assessing your ability to service - or pay back - a home loan. Your serviceability is based on your monthly expenses/outgoings/debts which is subtracted from all your monthly income. 

How do I qualify for a low deposit loan?

You will need to qualify for a low deposit home loan, with lenders taking a number of factors into account before they approve your home loan, specifically:

  • Demonstrated savings history, with the ability to save on a regular, monthly basis.
  • Reliable income, typically in the form of a regular wage or salary that can afford to repay the loan.
  • A record of stable employment, with consistent recent employment. 
  • A good credit score, based on information held in your credit report.
  • Debts are under control, with no outstanding payments to credit cards, personal loans and rent obligations.

Are there other ways I can get a low deposit home loan?

There are other ways you can provide the deposit lenders are looking for such as:

  • Obtaining a financial gift from a family member or relative.
  • Qualifying for the First Home Owners Grant (FHOG), a government scheme to help you get on the property ladder.
  • Using the existing equity in another property, which can act as security on your loan.
  • By taking out a personal loan, which can be used as your initial deposit.

How much can I borrow?

Not sure how much you can borrow? You can read our handy guide to understand how lenders determine your borrowing capacity.

Use our handy calculator to work out how much you can borrow, so you know what size deposit you need to save for. Simply input some basic information around your income, living expenses and how frequently you want to make repayments and it will give you a rough idea:

  • What type of property you can afford
  • How much your monthly repayments will be
  • The term - or length - of the loan based on the interest rate

You can then work out a savings plan and set some goals.

Apply for a low deposit home loan in 3 easy steps 

Wondering how to apply for your first home loan

With Yard it's a simple, three step online application you can complete anytime, from any device.

Step 1

Tell us about yourself: Securely share your personal financial details. We verify your identity, credit history and financials online.

Step 2

Design your loan: Design the features of your loan to match what works best for you.

Step 3

Get approved! When all of your details check out, we provide you with the decision on your low deposit loan!

We then settle your loan and take care of the rest so you secure your dream home asap!

Armed with this knowledge about low deposit home loans you should now be in a better position to start saving. Don’t forget to make use of the tools on our site to help you work out how much you can borrow or what your setup costs could be. 

Have any questions about saving for a deposit - or anything else? We’re happy to help, and our local team are available to chat at a time that suits your schedule.

Want to learn more?