A woman agrees with a lender on a low deposit loan

Coming up with a 20% mortgage deposit is a big hurdle for many Australians who are planning to buy a home. However, it is still possible to apply for a home loan even with as low as a 5% mortgage deposit.

The federal government’s First Home Loan Deposit Scheme, for instance, allows borrowers to pay as little as 5% down payment on their mortgages without having to pay the lenders’ mortgage insurance (LMI). But what if you are not able to get a spot in the scheme — how can you make sure that you still get an approval with your chosen lender?

What does it mean to have a 95% LVR loan?

When you have a 95% loan-to-value ratio (LVR), it means that your bank is allowing you to borrow 95% of your total property’s value. If the price tag of your target dwelling is $580,000, then you can borrow as much as $551,000 with a 95% LVR loan. This means that you only have to shoulder $29,000 as an initial deposit, substantially lower than the $116,000 for a 20% down payment.

Lenders usually impose stricter rules for borrowers with LVRs of more than 80%, as they are considered higher-risk. This is why for loans with high LVRs are typically charged additional for LMI.

Also read: Mortgage jargon explained: What is loan-to-value ratio?

What can cause banks to deny your application for a 95% LVR loan?

If you’re planning to apply for a 95% loan, it’s important that you put forward an impeccable application. There are some common reasons why lenders will decline a loan based on credit scoring, as follows:

  • You have had numerous credit checks performed on your credit file
  • You have high credit card debts and other personal loans
  • You have had a default registered against your name
  • Your time in your present employment is minimal
  • You have recently changed jobs and you’re still on probation
  • You have recently changed industries

What are the top 5 tips that can help you get an approval for a 95% LVR loan?

In order to increase the likelihood that you will be approved for a 95% loan, you should make sure that you do the followings:

  1. Obtain a copy of your credit file. This will tell you how many credit enquiries and defaults you have against your name
  2. Keep all of your payments up to date on your liabilities. This includes all of your monthly bills such as your mobile phone, car payments, credit cards and electricity bills
  3. Look at minimising your credit card limits and reduce your personal debts where possible
  4. Try to cut your spending and minimize unnecessary expenses in the six months leading up to your application
  5. Have a minimum of 5% of the purchase price of the property in genuine savings. This means that your deposit should not be a gift from a family member. This will help you prove your “credit-worthiness” with your lender. It is also going to help you if you really have a savings account apart from your deposit

Preparing for LMI

LMI often falls under the “hidden costs” of a mortgage. You should ask your broker or lender to explain how this is computed so you can prepare early. Depending on a few factors, taking out this insurance can cost anywhere from a few thousand dollars, up to tens of thousands of dollars. This makes it crucial that you factor this into the overall buying budget.

While LMI is usually paid up front, some lenders allow it to be bundled with your home loan. This means that you can scatter the fee across a certain amount of time within the total life of your loan. Take note however, that going with this will increase your monthly repayments and you will be paying added interest.

You can use Your Mortgage’s Lenders Mortgage Insurance Calculator to help you calculate the potential costs of this premium when you apply for a 95% LVR loan. You can also reach out to a mortgage specialist to help you with your application.

This is an updated version of a guide that was first published on 18 May 2011.