Can I get a home loan with a low deposit?

 Last updated: 20 May 2024 |  Estimated read time: 5 Minutes

Saving a deposit can be one of the biggest hurdles to buying a property – especially for first time buyers. But it may be possible to still achieve your dream of home ownership without having to save a huge deposit first.

With the cost of living increasing and property values high, there are more hurdles than ever for everyday Australians looking to get onto the property ladder – especially if you’re trying to save for a deposit and pay rent at the same time.

The good news is, you may not need to have the traditional 20% of the purchase price in the bank before you can start looking for a property. There are ways to buy a home with a low deposit – including a low-deposit home loan or government schemes. 

What are low deposit home loans?

Low-deposit home loans are a type of home loan you can get with less than 20% of the total purchase price of your property. With a low-deposit home loan, you may be able to get on the property ladder sooner. But because you’re borrowing a bigger portion of the value of your property, some lenders may view you as higher risk.

How much do I need to save for a low deposit home loan?

You may be able to get a low-deposit home loan with as little as 5% of the total value of your property saved. This will depend on the property and area you’re planning to buy in as well as your own personal financial circumstances, income and credit history.

When you borrow more than 20% of the total value of your property, your lender may charge Lenders Mortgage Insurance (LMI) – a one-off fee to offset the risks involved in borrowing a larger percentage of the value of your property.

If you want to avoid paying LMI, you can look for a lender that doesn’t charge it – like Pepper Money. Alternatively, there are a couple of government schemes that may help – if you’re eligible. 

Government help for low deposit home loans

It can be challenging to save up a deposit for many first-time buyers, but the government does offer a couple of schemes to help eligible borrowers get into their own home sooner.

First Home Owner Grant 

The First Home Owner Grant (FHOG) is designed to help eligible first time buyers get into their own home faster. Depending on where you live, you may be able to get a grant to help you with the costs of buying a house, townhouse or apartment.

The exact criteria and amount you’ll get will depend on your state1. For example, in NSW it’s $10,000 towards the purchase of a new or substantially renovated home and in VIC it’s $10,000 towards a home that’s not been previously sold or occupied.   

First Home Guarantee (FHBG)

The FHBG is part of the First Home Guarantee Scheme. Under the FHBG, Housing Australia will act as guarantor for your home loan, allowing you to buy it for as little as 5% deposit, without paying LMI. Places are limited on the scheme at 35,000 a year and you’ll need to meet income requirements2.

To apply for the FHBG, you’ll need to:

  • Earn less than $125,000 for individuals or $200,000 for joint applicants
  • Intend to live in the property you buy
  • Have not owned property or land in Australia in the last 10 years

Different property types come with different price caps, which you can find here. It depends where the property is located and the type of property you’re planning to buy. 

How to apply for a low-deposit home loan

Not all lenders offer low-deposit home loans, so the first step is to find one that does. At Pepper Money we have a range of flexible home loans, and can offer up to 95% of the purchase price – so you may be able to start looking for your new home with just a 5% deposit.

Your loan application will be assessed on your individual circumstances. A lower deposit home loan means you’re borrowing more, and the lender needs to make sure you can comfortably make the repayments. 

Here are a few things a lender may look at when assessing your low deposit home loan application:

Do you have reliable income?

This could be through full-time employment or self-employment. You’ll need to show that you earn enough to make your loan repayments, but you may still be able to get a home loan with low income

Are your debts under control? 

Having a lot of credit cards and personal loans may make it harder to get approved for a low-deposit home loan. So it could help your application if you pay off or consolidate your debts where you can before you apply.

Do you have a good credit history?

This is often used to indicate how well you manage your finances. To maintain a good credit history, make sure you pay all your bills on time, including rent, credit cards, personal loans and other debts for at least six months before applying for a low deposit home loan. 

Can I use a gifted deposit?

When you apply for any type of home loan, your lender will likely want to see a history of genuine savings – money you’ve been putting away regularly for a period of time (usually at least three months). In some cases, stocks and shares can also be considered genuine savings if you’ve held them for at least six months.

If you’ve just inherited money, or your parents have offered to help you out with a deposit, it’s usually classed as non-genuine savings. Because non-genuine savings don’t show how well you manage your finances, many lenders will view them more cautiously than genuine savings.

This doesn’t mean you can’t use a gifted deposit to buy a property. But it does mean you may need to find a lender that accepts gifted deposits.

 

We’re here to help

Looking to buy a home with a low deposit? To find out how much you can borrow, check out our borrowing power calculator or get in touch

Sources:

1 First Home Owner Grant: www.firsthome.gov.au

2 First Home Guarantee Scheme: www.housingaustralia.gov.au/support-buy-home/first-home-guarantee

     

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