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How do 5 percent deposit home loans work?

14 Oct2020

If you’re saving up for a home loan deposit for your first home, you already know it takes planning, discipline and dedication. But not everyone is in a financial situation where they can afford to spend many months or years saving up. If you aren’t in a position to provide a large deposit, applying for a low deposit home loan might be a more suitable option for you.


What is a low deposit home loan?

A low deposit home loan generally means a home loan where the lender will accept a deposit which is worth less than 20% of the total loan amount. This is just a ballpark figure, but it’s widely accepted that anything between a 5% and 20% deposit is considered a ‘low deposit’.

Low deposit home loans can help first home buyers buy their first home sooner. To work out what your mortgage repayment might look like, use the People’s Choice Home Loan Calculator to compare repayments at different interest rates.

What is the minimum deposit for a home loan?

The minimum deposit you can put down on a home loan depends on the policy of the individual lender. Some lenders will only accept a 20% deposit or larger, but some will accept 10% or even 5%.


Extra costs when you’re looking at 5% deposit home loans

Getting into your first home costs more than just your deposit. You’ll also have to pay other fees upfront like Government fees and charges, stamp duty, council rates, utility setup, conveyancing fees, and possibly even removalists or trades costs. Some lenders might let you add some of these costs to your loan amount, but it’s important that you read the fine print and ask questions before you sign on any lines.

What is Lender’s Mortgage Insurance (LMI)?

LMI is insurance that protects a lender if a borrower can’t meet their mortgage repayments.

If you apply for a low deposit home loan with a deposit of less than 20%, you’ll almost certainly need to pay LMI. The smaller your deposit, the more LMI you’ll have to pay — and with a 5% deposit on your new home, you could be looking at thousands of dollars extra. Many lenders will let you add this cost onto your loan, so you’ll have to factor that into your repayments or upfront costs.

If you’re buying your first home with a low deposit home loan, you may be eligible for the Australian Government’s First Home Loan Deposit Scheme which can help you avoid paying for LMI. It has limited places, but it might be worth looking into as it could potentially save you a lot of money if you get it.

How to make buying your first home more affordable

Luckily for you, there are a few Government grants and schemes which can make it more affordable for first home buyers to buy their first place, such as:

What is Loan to Value Ratio (LVR)?

LVR is the amount of money you’re borrowing to purchase a property, compared to its total value. If you’re already comparing low deposit home loans, you’ve probably seen the term pop up a few times. Most borrowers try to save the largest deposit they can and borrow as little as possible — which means aiming for the lowest possible LVR too.

As it’s expressing a ratio of figures, LVR is usually stated as percentage. Let’s look at a very simplified example to explain this further, if you were looking to purchase an apartment worth $400,000 and you had a $20,000 deposit.

First, take the property’s total value ($400,000), then subtract your deposit ($20,000), so you’re left with how much you need to borrow ($380,000). Please be aware this doesn’t take into account any fees or charges such as LMI or others. Now, to work out your LVR, put the amount you need to borrow over the total property value and convert it to a percentage ($380,000/$400,000 = 0.95 = 95%). While this is a simple example, it doesn’t take into consideration any additional fees and charges including LMI or others. Please check all fees and charges that are applicable to your personal situation when establishing LVR.


If you’re interested in taking out a low deposit home loan with us, check out our home loans comparison page for more information on rates, fees and LVR limits for each of our home loan options. If you’d like a more personalised look at your options, give us a call or book an appointment at your nearest branch.


This article is for information only and is not intended to constitute financial advice. Any views expressed are the views of People’s Choice Credit Union solely. This information must not be relied on as a substitute for financial planning, legal, tax or other professional advice.

First Home Buyer Guide: Grants, Schemes & Incentives

If you’re saving for your first home, we’re here to help. We've made understanding the Government’s grants and schemes nice and easy.

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