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 can expect to be charged higher interest rates with low deposit home loans, and would therefore face higher monthly repayments.
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, 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?
One alternative to low deposit home loans is a guarantor home loan, also known as a guaranteed home loan.
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)