Saving up a decent home loan deposit is not an easy feat, especially when the average house price in Australia keeps rising.
Whilst the general rule is lenders usually require a deposit of at least 20% of the purchase price of the property, there are some lenders in Australia who are willing to provide a home loan with just a 5% deposit. It’s also a good idea to check your state government or terrioty for rebates or schemes, as the Australian government also offer financial help to Australians with lower deposits.
Is it possible to get a home loan with a 5% deposit in Australia?
In short, yes it is possible. However it’s important to understand that lenders may view a 5% deposit as a higher risk than a larger deposit. As a result, if you are seeking a home loan with a 5% deposit, in order to qualify you may need to have a:
- Higher credit score
- Higher household income, or a
- Lower debt-to-income ratio
- Using a Gurantor
It’s also worth noting that if you are trying to get a home loan with a 5% deposit, you may need to pay additional fees or charges. In some cases, the lenders will want you to pay lenders mortgage insurance (LMI). This mortgage insures the lender in case you default on the loan. This is an additional cost to take into consideration and may make it more expensive than a loan with a larger deposit.
And don’t forget - the interest rate on a home loan with a 5% deposit may possibly be higher than the interest rate on a loan with a larger deposit. The wise thing to do is always compare rates and terms from multiple lenders to ensure you are getting the best deal for your needs.
Factors to consider when applying for a home loan with a 5% deposit:
- Credit score: When you are seeking a home loan with a 5% deposit you may need to have a higher credit score in order to qualify for a loan (it certainly helps). It is a good idea to check your credit score before applying for a home loan and to address any issues that may impact your ability to get approved. You can read more about credit scores and how they impact your borrowing capacity here.
- Income and debt-to-income ratio: In addition to credit score, lenders may also consider factors such as your income and debt-to-income ratio when assessing your ability to repay a home loan with a 5% deposit. If you have a higher income and a lower debt-to-income ratio, you may have an easier time getting approved for this type of loan.
- Fees and charges: Keep in mind additional fees or charges, such as mortgage insurance. It is important to understand these costs and factor them into your budget to ensure that you can afford the loan.
Benefits of a 5% home loans?
- Get into the market with a smaller investment: This can be particularly helpful for first-time homebuyers who may not have a large amount of savings.
- The ability to take advantage of government incentives: In Australia, the government offers incentives to encourage people to buy their first home, such as the First Home Owner Grant (FHOG) and the First Home Loan Deposit Scheme (FHLDS). These incentives can help reduce the overall cost of buying a home, making it more affordable for those with smaller down payments.
- Access equity: A lower deposit means you are getting into the market and have the potential to build equity faster. Although your deposit might be smaller, you still may be able to afford a more expensive home, which could increase in value over time. This equates to you having the ability to possibly build equity faster and potentially sell the home for a nice profit down the line.
Of course, there are also potential drawbacks to a 5% deposit home loan and it's important to carefully consider all of the pros and cons before deciding if this type of loan is right for you. Let’s look at what the risks might be:
Are there any risks?
As with any type of mortgage, there are risks involved with a 5% deposit home loan. Some potential risks to consider include:
- Higher monthly mortgage payments: Because you're borrowing a larger amount of money, your monthly mortgage payments may be higher with a 5% deposit home loan than they would be with a larger down payment. This could make it more difficult to afford your mortgage payments, especially if interest rates go up.
- Higher interest rates: Because you're borrowing a larger percentage of the purchase price of the home, you may be charged a higher interest rate on your loan. This could increase the overall cost of borrowing and make it more expensive to repay the loan.
- Negative equity: If the value of your home decreases, you could end up owing more on your mortgage than the home is worth. This is known as being in negative equity, and it can make it difficult to sell the home or refinance the loan.
- Difficulty getting approved: Because you're borrowing a larger percentage of the purchase price, it may be more difficult to get approved for a 5% deposit home loan. Lenders may require you to have a higher credit score and a stronger financial profile in order to qualify for the loan.
Banks offering 5% deposit mortgages
There are several banks and lenders in Australia that offer 5% deposit home loans, including major banks such as Commonwealth Bank, Westpac, ANZ, and NAB. These institutions offer a range of mortgage products with low deposit options, allowing you to borrow a significant portion of the purchase price of the home.
In addition to the major banks, there are also a number of smaller lenders that offer 5% deposit home loans. These include lenders such as:
- Macquarie Bank,
- ING, and
- ME Bank.
These institutions may offer more flexible lending criteria and competitive interest rates, making it easier for you to qualify for a 5% deposit home loan.
It can also be helpful to speak with a financial advisor or mortgage broker. They can provide expert advice on the best 5% deposit home loan options for you, and help you navigate the process of applying for and securing a mortgage.
Speak to a mortgage broker about your 5% deposit today:
Having a larger deposit can have a positive impact on the outcome of your home loan application and the interest rate that lenders will be willing to offer you. However if you are struggling to save for a higher deposit , 5% deposits may be a good option for you. . Regardless of how much you have saved, see what competitive home loan offers you could access by using Joust Instant Match. You’ll be matched with up to 3 lenders with a competitive offer to help you get into the property market.. Get started today.
*The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Joust recommends that you consider whether it is appropriate for your circumstances. Joust recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.
