How can I get a five per cent deposit home loan?

Despite recent property price falls, it’s still difficult to get together a 20 per cent home deposit.

If you’re renting and trying to save up around $130,000 – the average 20 per cent deposit on first homes in Sydney – you’ll know it’s no easy task. On average, couples need to save for five or six years to get on the ladder.

Thankfully, both banks and the government have noticed this struggle and have come up with some initiatives to help. While not much can be done about house prices themselves, a lot can be done to reduce the amount of deposit people need to save up.

The tyranny of the 20 per cent deposit

Traditional wisdom told homebuyer hopefuls that a 20 per cent deposit was essential in order to secure a home loan. This meant many people having to forgo their dream home because they simply couldn’t raise the deposit in time.

There are lenders that will offer home loans with a 5 per cent deposit, but they’re few and far between and any loans with a deposit smaller than 20 per cent usually involve paying Lenders Mortgage Insurance (LMI).

Looking for a low deposit home loan

Many lenders that offer small deposit mortgages will ask for you to pay LMI, an amount that varies with the size of the loan and can be quite sizeable. Sometimes you pay it upfront, while sometimes it’s added to the loan balance.

If you can pay it off alongside your monthly loan repayment then you’ll find this much more manageable.

More about LMI

This insurance protects the lender, not you, but it does allow them to give you the loan in the first place. This move has helped people to get home loans with smaller deposits.

You’ll need to factor your LMI into your monthly repayments and if you can bump your deposit up as much as possible over five per cent, you’ll be helping yourself. If you’re in a position to make regular overpayments, then definitely do so as having a 95% LVR home loan can feel like a big burden.

Show good money management

Your lender will want to see evidence of your ability to service the loan and will do so by looking at your credit score and history. It’ll also look at your income and your bank statements to make sure your income is steady and you have good spending habits.

If you can point out good behaviour like your deposit savings campaign, or taking on overtime or a side gig to boost your income, then your lender is more likely to view you favourably.

Don’t think about a personal loan

A personal loan isn’t a good way to fund your deposit because the interest rate you’ll pay on it will be much higher than that applied on your mortgage. It also tells your lender that you already have a debt load and that you maybe haven’t been as careful or as proactive with your income and earnings. Some of the money that you should be using to pay off your mortgage is going to a loan instead.

Ask someone to be a guarantor

If you want to try to avoid paying LMI, then another option is to ask a relative or (very good) friend to act as a guarantor for you. Your guarantor agrees to take on responsibility for either covering the deposit or for taking over the monthly mortgage repayments for the foreseeable if you’re unable to meet your payments.

It’s a huge ask, admittedly, and the guarantor is taking on risks. So your guarantor can’t be just anyone.

Your bank or lender will want to look at them to make sure that they can cover your payments or fund the loan if you default. Your guarantor will have to go through a similar sort of application or verification process as you.

Look for a cheap property in an up–and–coming area

If you only have the equivalent of a five or ten per cent deposit on a starter home in Sydney, then why not make it go further by looking elsewhere?

Of look for a reno? An older property that needs work.

This sort of approach has another benefit besides bagging you a cheaper property; it can offer you a significant return on your investment if you choose the right area and your property rises in value.

Even if you buy a tiny little apartment, if you do it up well and the neighbourhood becomes trendy, you can sell it and make an upgrade.

Think about government schemes

Australia has a number of schemes to help first home buyers.

New South Wales has the First Home Buyers Assistance Scheme, which helps first–timers to buy a home with grants and concessions.

Victoria offers a First Home Buyer Duty Exemption or concession and a First Home Owners Grant for new homes outside of the Melbourne metro area.

Queensland has a first home owner grant and other states have similar schemes.

There’s also the federal government’s First Home Super Saver Scheme, which lets first–timers save up their deposit within their superannuation savings accounts.

Prime Minister Scott Morrison made an election promise to offer 10,000 first home buyers a guarantee of up to 15 per cent of the value of their home loans to help them get into the market with just a five per cent deposit.

Good information and advice is key for first home buyers. Speak to an expert and compare mortgages on a reliable comparison site before you make any moves.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.