Compare low deposit home loans
There is a range of lenders in Australia that offer low deposit home loans. Rates, fees and features can vary substantially, so shop around.
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What are low deposit home loans?
A low deposit home loan is one in which the borrower makes a deposit to the lender that is less than 20 per cent of the property value.
Borrowers who deposit less than 20 per cent of the property value will generally have to pay lender’s mortgage insurance (LMI) to secure the loan, unless it is a guarantor home loan. This could wind up costing thousands of dollars.
Who offers low deposit home loans?
Low deposit home loans are offered by a wide range of banks, credit unions, building societies and non-bank lenders.
These loans are not as readily available as other home loans, but low deposit home loans for first time home buyers in Australia are offered by some financial institutions, as are other types of mortgages like low deposit investment loans.
How do you compare low deposit home loans?
Using RateCity’s home loans comparison tool, here are some of the things borrowers should consider when applying for a low deposit home loan:
- Advertised rate – the monthly interest rate that will be paid on the loan. This will be either a variable or fixed rate, or a combination (known as a ‘split loan’)
- Comparison rate – a combination of the interest and fees the borrower will pay on the loan
- Monthly repayment – how much the borrower is expected to pay per month to the lender
- Total repayments – the amount the borrower will pay during the life of the loan
- Loan fees – includes the upfront and ongoing fees that the borrower will pay to the lender
- Minimum deposit – the percentage of the property value the borrower will have to deposit initially
- Loan term – the duration of time the borrower will have to pay off their loan.
How can you improve your chances of being approved for a low deposit home loan?
You can improve your chances of being approved for a low deposit home loan by establishing a good credit history, steady employment history and reliable income.
A low deposit home loan is riskier than a regular home loan, because the borrower has more money to repay and is likely to be charged a higher interest rate. So the lender needs to feel particularly secure about the borrower’s ability to make monthly repayments.
If you have bad credit, you can improve your chances by finding someone to guarantee your loan.
What are the pros and cons of low deposit home loans?
The big advantage of low deposit home loans is that they allow borrowers to enter the market several months or even several years ahead of schedule.
This not only means borrowers can achieve the ‘great Australian dream’ of home ownership sooner than they otherwise might - there are also two financial benefits.
First, borrowers can stop spending ‘dead money’ on rent and instead use that money to build equity in their own property. Second, if property prices are rising, borrowers might be able to buy their home for tens of thousands of dollars less than they might have to pay if they had to delay their purchase for a couple of years.
The big disadvantage of low deposit home loans is that borrowers generally have to spend dead money on lender’s mortgage insurance.
Also, low deposit home loans tend to be more expensive than regular home loans, because they usually come with higher interest rates, and sometimes higher fees as well.
Another problem is that fewer lenders offer low deposit home loans, which means that lenders don’t have to fight as hard to win borrowers’ business.
Dan and Lisa are first home buyers who want to purchase a $600,000 property. Unfortunately, they only have enough money for a 10 per cent deposit ($60,000), which is below the 20 per cent level that most lenders demand.
However, by making a home loan comparison, Dan and Lisa find a lender that will lend them 90 per cent of the purchase price, or $540,000. But there are two catches. First, they have to pay $18,261 in LMI. Second, their interest rate is 0.30 percentage points higher than it would’ve been if they’d had a 20 per cent deposit.
What are some alternatives to low deposit home loans?
Lenders regard guarantor home loans as less risky than low deposit home loans, because the guarantor (usually a close family member) promises to pay off the mortgage if the borrower fails to do so. The guarantor provides further confidence to the lender by offering up their own property as security.
Another option is for borrowers to delay their purchase until they can save a 20 per cent deposit. If possible, this would allow borrowers to avoid LMI and to qualify for lower interest rates.
How can I take out a home loan if I have bad credit?
It won’t be easy, but securing a bad credit home loan is achievable for those who can show an improved financial situation. Evidence could include things such as improved employment, income and bill payment history.
Borrowers with bad credit who have access to a guarantor will probably find this to be the most successful avenue to securing a loan. Before applying for a guaranteed loan, the borrower and guarantor should have an honest discussion and set realistic expectations.
How can I improve my credit rating?
Here are three things you can do to improve your credit rating:
- Pay bills on time
- Pay off loans
- Reduce your number of credit cards (or even give up credit cards entirely)
Property Personal Finance Writer
A property and personal finance writer, Nick Bendel covers property, loans, credit cards, superannuation, and other bank products. Nick has previously written for The Adviser, Mortgage Business, Lifehacker, Business Insider, Yahoo Finance, and InvestorDaily, and loves getting elbow-deep in the latest ABS, APRA and RBA data.
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Frequently asked questions
How much deposit do I need for a home loan from ANZ?
Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:
- A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
- The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
- If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).
What is a low-deposit home loan?
A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.
For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.
As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.
Does Australia have no-deposit home loans?
Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.
However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.
Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.
How common are low-deposit home loans?
Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.
However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.
How do I take out a low-deposit home loan?
If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.
Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.
What are the pros and cons of no-deposit home loans?
It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.
The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.
But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.
Are bad credit home loans dangerous?
Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.
Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).
That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.
What is a bad credit home loan?
A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.
If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.
How much deposit will I need to buy a house?
A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.
While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.
How can I get a home loan with bad credit?
If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.
One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.
Two points to bear in mind are:
- Many home loan lenders don’t provide bad credit mortgages
- Each lender has its own policies, and therefore favours different things
If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.
Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:
- You have a secure job
- You have a steady income
- You’ve been reducing your debts
- You’ve been increasing your savings
What if I can't pay off my guaranteed home loan?
If you can’t pay off your guaranteed home loan, your lender might chase your guarantor for the money.
A guaranteed home loan is a legally binding agreement in which the guarantor assumes overall responsibility for the mortgage. So if the borrower falls behind on their mortgage, the lender might insist that the guarantor cover the repayments. If the guarantor fails to do so, the lender might seize the guarantor’s security (which is often the family home) so it can recoup its money.
How do guaranteed home loans work?
A guaranteed home loan involves a guarantor (often a parent) promising to pay off a mortgage if the principal borrower (often the child) fails to do so. The guarantor will also have to provide security, which is often the family home.
The principal borrower will usually be someone struggling to find the money to enter the property market. By partnering with a guarantor, the borrower increases their financial power and becomes less of a risk in the eyes of lenders. As a result, the borrower may:
- Qualify for a mortgage that they would have otherwise been denied
- Not be required to pay lender’s mortgage insurance (LMI)
- Be charged a lower interest rate
- Be charged less in fees
How will Real Time Ratings help me find a new home loan?
The home loan market is complex. With almost 4,000 different loans on offer, it’s becoming increasingly difficult to work out which loans work for you.
That’s where Real Time RatingsTM can help. Our system automatically filters out loans that don’t fit your requirements and ranks the remaining loans based on your individual loan requirements and preferences.
Best of all, the ratings are calculated in real time so you know you’re getting the most current information.
Mortgage Calculator, Interest Rate
The percentage of the loan amount you will be charged by your lender to borrow.
What is the ratings scale?
The ratings are between 0 and 5, shown to one decimal point, with 5.0 as the best. The ratings should be used as an easy guide rather than the only thing you consider. For example, a product with a rating of 4.7 may or may not be better suited to your needs than one with a rating of 4.5, but both are probably much better than one with a rating of 1.2.
Mortgage Calculator, Loan Amount
How much you intend to borrow.
Mortgage Calculator, Repayments
The money you pay back to your lender at regular intervals.
What is the amortisation period?
Popularly known as the loan term, the amortisation period is the time over which the borrower must pay back both the loan’s principal and interest. It is usually determined during the application approval process.
How often is your data updated?
We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.
What happens to your mortgage when you die?
There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.
If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.
If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.