Property prices across the country have been steadily rising for years but income levels haven’t increased at anywhere near the same rate. As a result, that ideal of the 20% deposit is too far out of reach for many.
If this is the case for you, you can still apply for a low deposit home loan.
What Is a Low Deposit Home Loan?
A low deposit home loan refers to a loan with a deposit that is less than 20% of the property value. Banks like to see a deposit of 20% or more with residential mortgage lending. Anything less than this is viewed as a high risk from the lender’s perspective.
However, most lenders still offer home loans with a smaller deposit. These low deposit loans are also known as high Loan to Value Ratio (LVR) home loans because the ratio of the deposit to the property price is considered high – it’s greater than 80%.
The bank is taking on more risk lending to you when you have a low deposit and need to borrow more than 80% of the purchase price. If you happen to default on your mortgage, your lender will have to recoup the money used to purchase the property. If home values go down or if the property sits on the market for a long time, the bank could lose money. This is why banks prefer a larger deposit; it helps to prevent them from taking a loss.
As long as you meet other lending criteria, however, you can still qualify. Keep in mind, lenders will have stricter criteria and certain requirements if you are applying for a home loan with a small deposit.
How Much Do I Need for a Low Deposit Loan?
The higher your deposit, the easier it will be to get the loan you want and the more options you’ll have. You may be able to qualify with different lenders with a:
- 15% deposit
- 10% deposit
- 5% deposit
- 3% deposit
Call us on (07) 3146 5732 or fill in our home purchase enquiry form to learn more about what loan you can qualify for based on your unique financial situation.
How to Qualify for a Low Deposit Loan
Here’s the thing, as long as you have at least a 3% deposit and you can demonstrate you are a reliable borrower, some lenders will be willing to approve your loan application. All lenders will have their own criteria for low deposit home loans but, in general, these are the standards you’ll want to have met before you apply.
Good credit: Missed or late payments on personal loans and credit cards, a history of overdue rent, or any other black marks on your credit file will make it hard to qualify, especially if your deposit is 10% or less than the property value. You want to enter into the application process with squeaky clean credit, with the last two years of your credit history holding the most weight.
Minimal debt: When you are about to borrow hundreds of thousands of dollars to buy a house, you want your other debts to be as low as possible, especially any unsecured debts like credit cards or an unsecured personal loans. Ideally, your unsecured debts total less than 5% of the purchase price when you apply for a low deposit loan.
Strong income: One of the most important factors for any type of home loan is your income. It needs to be high enough to allow you to comfortably manage your mortgage repayments. Keep in mind, if you have a high income but you also have high expenses, banks may view this as a red flag. Banks also prefer a consistent income. This makes it easier for them to assess your loan serviceability, which is your ability to make your repayments.
Stable job: Lenders want to know you are likely to maintain this strong income. Ideally, you’ve worked at your current job full time for at least 6 months. If you are self-employed, a minimum of 1 to 2 years is preferred. Banks will also consider how long you’ve been in the same line of work. They want to see at least 2 years in the same industry.
Seasoned savings: With a high LVR loan, it’s even more important to demonstrate you know how to responsibly manage your finances. One factor lenders will look at to get an understanding for your financial habits is your savings history. Ideally, you’ve been saving for your deposit over time. On the other hand, a lump sum in your savings account – for example, if your parents gifted you all or most of your home deposit – doesn’t do anything to demonstrate your financial responsibility.
Appropriate asset position: Lenders will assess your asset position relative to your age and income. If you are in your early 20s and are buying your first home, banks won’t expect you to have accumulated a lot of assets, like a car, investments, and savings. However, if you are older, and especially if you’ve been earning a high income for a number of years, lenders will see it as a red flag if you don’t have many assets.
When applying for a low deposit home loan, it’s also important to consider both the nature of your property and the purpose of the loan to increase your chances of qualifying.
Banks usually have special restrictions on some low deposit loans. If the property type or location would make it difficult to sell in the future if you do happen to default on your repayments, the bank may not be willing to offer you a mortgage without a bigger deposit. Restrictions include properties that are in high rise buildings or mining towns.
Why you want the loan also matters. If you are buying your first home or investing in a new property, or you want to refinance to save money on lower interest rates, your loan purpose shouldn’t raise any concerns. If, on the other hand, you need to refinance to consolidate your other debts, a bank will think twice about a high LVR loan because of the risk involved for them.
Low deposit home loans include a wide range of Loan to Value Ratios. And, there’s no one-size-fits-all criteria for qualifying for a high LVR loan. But, in general, the lower the LVR (and the higher your deposit in relation to the property value) the more flexibility you’ll have when applying. For example, with a 15% deposit, lenders will be more lenient with their criteria than they would be if you only had a 5% deposit. You’ll also have more lenders to choose from with a bigger deposit, even though you are still applying for a low deposit home loan.
At Nexus Money, we specialise in high LVR home loans and know what different lenders are looking for. If you want to know more about what your low deposit loan options are, call us on (07) 3146 5732 today.
Which Lenders Offer Low Deposit Loans?
Not all lenders approve low deposit home loans even if you meet all the lending criteria in terms of income, credit, and your debt and asset positions. The major banks, in particular, hesitate to approve mortgages with an LVR over 80%.
Most lenders will approve a low deposit mortgage with at least a 10% deposit but only if you can prove you are a strong borrower. Also, you’ll likely have to pay Lender’s Mortgage Insurance (LMI).
For a deposit that is smaller than 10% of the purchase price, you’ll be limited to non-bank lenders. There are a few non-bank lenders that will approve a low deposit mortgage application with a 5% deposit and even fewer who will approve a loan with a 3% deposit. These non-bank lenders also tend to have higher interest rates.
It’s not always easy to figure out which lenders will approve low deposit mortgage applications. For borrowers with a low deposit, we know which lenders have more flexible lending criteria.
Call us on (07) 3146 5732 or fill out our online enquiry form to learn about how we can help you.
Low Deposit Home Loan FAQs
Will I have to pay a higher interest rate?
Not necessarily. If other factors aside from your deposit size, like income, having a lot of assets, and clean credit can demonstrate your strength as a borrower, you may still be able to qualify for a mortgage with a competitive interest rate. It all depends on the whole story of your financial situation.
Do non-bank lenders offer special deals on high LVR loans?
They do from time to time. We know when lenders offer interest rate discounts, rebates, and other special offers for low deposit loans. Contact us today to learn more.
Do I have to pay LMI?
Having to pay Lender’s Mortgage Insurance will add to the overall cost of your mortgage. You want to avoid paying it if you can. When you have a low deposit, you can find a guarantor to secure your mortgage with their property to avoid LMI.
Also, some lenders offer 90% LVR home loans to eligible professionals such as doctors and dentists. They’ll either waive LMI of offer a discounted premium.
In both cases, with a guarantor or with a 10% deposit if you are a qualifying professional, be prepared to meet strict lending criteria in order to qualify.
Does it matter which lender I choose?
One thing a lot of borrowers don’t realise is how much the lender you choose can impact your loan. First, if you pick a lender you aren’t likely to qualify with, you could end up going through the application process, paying fees, and still have your application denied.
Second, there are numerous factors – in addition to the interest rate – that will impact your mortgage experience such as special discounts and flexible features. This is why it’s so important to work with an experienced mortgage broker who can help you get the most out of your mortgage.
Should I just save enough for a 20% deposit?
This depends. If you can save a 20% deposit, you can avoid paying LMI – which can save you thousands of dollars. You also will be able to qualify for the most competitive loans on the market if you are a blue chip borrower with a good credit history, a high, stable income, and healthy asset and debt ratios. But, you need to consider how long it will take to save a 20% deposit. While you save, property prices could increase, meaning you’ll need to save even more money to come up with the 20% deposit.
High LVR Loan Basics
When exploring your options for a low deposit mortgage, this information will help you make a better informed decision when comparing loan products and lenders.
10% Deposit and 15% Deposit Loans: What to Expect
With a 10% deposit or 15% deposit, you’ll have more negotiating power as a borrower than you would with less than 10% of the property value saved.
- You may be able to qualify with both banks and non-bank lenders so you’ll have a lot of options.
- You’ll be able to qualify for the same low interest rate as borrowers with a 20% deposit.
- You’ll, most likely, have to pay LMI, which is usually around 2% to 4% of the purchase price.
- You’ll have to meet strict lending criteria in order to qualify for the best loans.
5% Deposit and 3% Deposit Loans: What to Expect
Your options will be limited with a smaller deposit. You may not qualify unless you can meet high standards for credit, income, assets, and personal debts.
- Only a few lenders will approve your mortgage application.
- You’ll have to pay LMI.
- You may end up paying a higher interest rate than what the big banks are offering.
- You’ll still have to prove you’re a reliable borrower.
Requirements for a Genuine Savings
With low deposit lending, having a genuine savings is really important. But, what exactly is a genuine savings?
- Deposits into a savings account over a 3-month period.
- Term deposits, shares, or managed funds held for at least 3 months.
- In some cases, lenders will let you use equity you have in another property or a strong rental history to demonstrate your ability to save.
However, the larger the deposit, the more flexible a lender’s genuine savings requirements will be.
- With a 3% to 5% deposit, you’ll definitely need a genuine savings.
- With a 10% to 15% deposit, most lenders will want to see a genuine savings.
- With a 15% to a 19% deposit, you can qualify with most lenders without a genuine savings.
What About No Deposit Home Loans?
You may have heard of no deposit home loans before – where you can borrow 100% of the purchase price as well as the extra costs of buying a home. While years ago, eligible borrowers could qualify for a mortgage without a deposit, today it’s not possible without some sort of extra security.
There are strategies you can use to get a mortgage without saving for a deposit:
- Use a guarantor.
- Secure the loan with equity from another property.
- Use your superannuation as a security.
How Much Is LMI?
Did you know that LMI premium rates differ from one lender to the next? How much you’ll pay will depend on several factors, including:
- A larger loan means a higher LMI premium.
- If you are taking out a low doc loan for self-employed borrowers or not.
- The set rates of the insurance provider the lender uses.
If you have any negotiating power to get a discount on LMI.
How Do I Find My LVR?
LVR is the amount you have to borrow in relation to the property value. You can find it by dividing the loan amount by the property value.
For example, if you have to borrow $450k to purchase a property valued at $500k, your Loan to Value Ratio would be:
$450k / $500k = .90 or 90% LVR
Can I Get a Low Deposit Interest-Only Loan?
With a 5% deposit or less, you probably won’t be able to take out an interest-only loan. You also won’t be able to get a line of credit loan. However, no matter what size your deposit, once you qualify for a loan, you’ll enjoy the same features and interest rates as a borrower who took out the loan with a 20% deposit or larger.
This is because a low deposit loan isn’t a different type of loan product. It simply refers to a loan you qualified for with a low deposit. If your mortgage product has a 100% offset account, free redraw, and other features, they won’t change because of your original deposit size.
The difference is, you’ll probably have to pay LMI. And, it’s more difficult to qualify in the first place because all lenders have stricter criteria for low deposit borrowers.
Ready to apply for your low deposit home loan?
Get started today. Complete our online enquiry form or speak directly with one of our low deposit mortgage experts by calling (07) 3146 5732(.