When it comes to putting down a deposit on a new home, you might want to know what your options are. While the recommended amount for a deposit is 20% of the property price, your deposit can actually vary.
This means that if you’re strapped for cash, you can actually use a smaller deposit to secure your property. Depending on the lending criteria, some loans will allow you to secure a loan with only 5% of the value of the property.
Bear in mind that a 5% deposit will mean something very different in different parts of Australia. A 5% deposit in rural NSW will be very different to a metro Sydney postcode, and the same goes throughout the country.
The higher the percentage of the property value that you pay, the less money you’ll have to borrow. This is called a loan-to-value ratio, or LVR. A low-deposit home loan with a high LVR may come with higher interest rates and stricter eligibility criteria.
What is the minimum deposit for a mortgage?
In terms of managing risk, most banks will recommend that you put down a 20% deposit when you buy a property.
This might be the standard, but there are still plenty of options available for you if you have a small deposit at hand.
The smallest deposit you can have to be considered for most home loans will tend to be 5% (which means you are borrowing 95% of the property’s value).
Since you will be borrowing more money with a smaller deposit, this does mean the home loan application process can be more intensive. You may end up with larger home loan repayments due to this larger loan.
When you pay a low deposit, you will also most likely need to consider Lenders Mortgage Insurance (LMI), to give greater security to your loan provider. This will be required with low-deposit home loans where the LVR is more than 80%.
There are certain instances where you may be able to provide an even smaller deposit, or even no deposit.
These are special circumstances (in the case of the 5% Deposit Scheme's Single Parent Stream, which allows a 2% deposit) or different types of home loans (in the case of Guarantor Loans).
Can I get a home loan while on parental leave?
How do I get approved for a home loan with a 5% deposit?
If you’ve decided to apply for a low-deposit home loan, you’ll want to make sure your finances are in the best shape possible to improve your chances for approval.
Since you will be subject to a thorough credit check, this means paying off any outstanding loans and making sure you are on top of any credit card repayments.
You will also want to be able to demonstrate proof of stable employment and genuine savings as evidence of your ability to make home loan repayments. Things like parental leave can also impact your eligibility with some lenders.
Check the loan in question for any specific eligibility criteria and make sure to prepare any necessary documentation.
And remember — though a smaller deposit may be easier to manage now, interest rates change and mortgage repayments shift. You need to be able to make your home loan repayments through thick and thin, so there’s a big risk in overcommitting to something you won’t be able to withstand.
