Can I buy a home with only a 5% deposit?

While saving up for a 20% deposit is the goal for many first home buyers, in today’s property market, this is not always achievable. If you want to buy a house and find yourself in this situation, there are still options available for you to get on the market without having to wait. Here we’ll walk you through your options to buy a home with only a 5% deposit.

Can I buy a home with only 5% deposit?

The short answer is yes, it’s possible to buy a home with only 5% deposit depending on your individual situation. This is done through a low deposit home loan, often called a 95% home loan. You’ll need to be aware that a low deposit comes with extra criteria and costs, one notable extra cost to keep in mind will be Lender’s Mortgage Insurance (LMI). LMI is a fee typically charged by lenders when borrowers have a high LVR (over 80%).

You’ll also need to consider the extra costs involved in purchasing a property such as stamp duty, valuations, legal fees and establishment fees charged by some lenders when you apply for a home loan.

• Related: What are the hidden costs of buying a home?
• Related: 6 simple tips to make your dollar go the extra mile
• Related: How to own your own home sooner

What is LMI and will I have to pay it?

LMI is a form of insurance charged by lenders in order to account for the additional risk borrowers with a deposit less than 20% pose. This can cost anywhere between 1-3% of the loan amount. For more information, read our guide to LMI here.

Having said this, there is a way to avoid paying LMI even with a deposit of only 5% and this is through the use of a guarantor loan.

What is a guarantor loan?

A guarantor loan is a type of loan taken out with a guarantor - generally an immediate family member i.e. a parent, though in some cases this might be extended to more distant family members, like a sibling or aunt. This guarantee will allow the equity in the guarantor’s home to be used as a form of extra security for your loan and will also mean that you won’t need to pay LMI.

Read our complete guide to guarantor loans here.

How does a guarantor loan work?

The equity from your guarantor’s property must cover at least 20% of the loan and while your new property will still remain as the primary form of security, the lender will also take out a new loan on your guarantor’s property.

This will remain until either the guarantee expires or the guarantor is removed. This happens when the guaranteed portion has been paid or when debt level is no longer greater than 80%. Until then, a guarantor loan is a legally binding contract, which means the guarantor will be liable to pay back the entirety of the loan should the borrower be unable to.

Are there any downsides to a guarantor loan?

For the guarantor, there are a number of risks that they must take on board, the predominant one being the ability to repay the loan falls solely on them if you (the borrower) default on your loan. This also means that they are at risk of losing their property if neither you or he/she is able to make these repayments. Guarantors are generally also unable to borrow against their assets until the loan has been paid off.

What's the criteria for guarantor loan approval?

Guarantor home loans come with strict application criteria and lenders do not approve these loans lightly. At a minimum both you, the borrower, and the guarantor must have the following:

• A good credit history (this may mean paying off any existing credit card debt to increase your chances of approval, read about ways to improve your credit score here).
• Stable income and employment
• A strong asset and equity position

Read our guide to no deposit home loans to find out more.

What other ways can I buy a home with a 5% deposit?

Aside from guarantor loans, there are other ways to buy a house with a low deposit and avoid LMI at the same time:

• Use equity in existing property - If you already own a property for investment purposes and do not wish to sell it yet, you can use the equity in this existing property to take out a new loan. The lender will then use this investment property as security for the new loan.
• Monetary gift - If someone close to you i.e. parents or loved ones have enough savings, you can ask for a ‘monetary gift’ of say 10%, to help you pay for the initial deposit.
• First Home Owners Grant (FHOG) - If you are aiming for a larger deposit, FHOG can help to form part of it, provided that you are eligible. Learn more about the First Home Owners Grant here.

Are there are any downsides to getting a 95% home loan?

Generally 95% home loans come with higher interest rates, higher fees and strict lending criteria due to the risks they pose for the lender. Having said that, property market competition is high and by researching and comparing all the rates out there, it is possible to find a reasonable variable rate home loan for a 95% loan. Our smart technology at Lendi can help with this, talk to a Lendi Home Loan Specialist to find out more.

With a smaller deposit, it will also usually mean that your monthly repayments will be higher over the average 25 year loan term. Use our repayments calculator to find out how much you could be paying each month.

How do I increase my chances of getting a 95% home loan approved?

Be mindful that low deposit loans are not suitable for everyone and your chances of getting approved are heavily dependent on your financial credibility. Lenders will be understandably cautious with borrowers who have a small deposit amount so it’s a good idea to demonstrate your credibility by minimising your debts and paying your bills on time.

You should also ensure your credit score is healthy and that you maintain a steady income stream whilst doing your best to maximise the level of savings you have.

95% home loan application criteria

To successfully buy a home with only a 5% deposit you’ll need to fit the following home loan application criteria:

• Be 18 years or over.
• Be a permanent Australian resident/citizen.
• Have stable employment and income.
• Demonstrate a good credit history.
• Have little to no debt e.g.credit card debt.
• Intend to live in the property as an owner occupier.
• Have a high serviceability ratio i.e. high income to make monthly repayments.
• Ideally have ownership of some assets.
• Be looking at a property type or location that is considered “standard” i.e. not overly expensive and in the metropolitan region.

If you are able to meet the above criteria and have genuine savings of 5% of the purchase price, it can be possible to buy the property you’re after, even without the standard 20% deposit. Talk to one of our Home Loan Specialists today for more information about rates and competitive lenders.

Got a home loan question?

We're here to give you answers. Schedule a time to chat with a Home Loan Specialist here.