Everything you need to know about low deposit home loans

Saving for a 20% deposit can present a major hurdle for those entering the housing market. Anyone who says otherwise should take a look at Australia's median house price. 

Fortunately, low deposit home loans offer an alternative path to homeownership, allowing you to scramble onto the property ladder with a small (or even nonexistent) deposit.

What is a low deposit home loan?

A low deposit home loan is generally considered to be one that's available to borrowers who don't have a traditional 20% deposit. If that's you, you're likely not alone. With the median house price in Australia's capital cities being over $1 million at the time of writing, a 20% deposit would equal around $200,000 upfront – hardly pocket change.

Thus, low deposit home loans are popular among first home buyers and property investors who don't have substantial capital to put down.

You won't usually find a product named 'low deposit home loan' – it's an umbrella term used to describe any mortgage product avaliable to borrowers with less in savings.

It's common for home loans to be open to home buyers and owners with deposits as small as 5%. Some might even allow a person with a deposit as small as 2% to enter the market while others could accept a guarantor, which could negate the need for a deposit entirely.

The catch? Lenders Mortgage Insurance (LMI)

However, there is a downside. If your deposit is less than 20% and you don't have a guarantor, your lender will likely ask you to pay for Lenders' Mortgage Insurance (LMI). This fee can significantly increase the overall cost of purchasing a property, adding thousands of dollars of expenses.

Will you have to pay for LMI? If so, how much could you be up for? Get a personalised estimate with our LMI Calculator

Lenders charge LMI to protect themselves from losses in the event a low deposit borrower defaults on their home loan. If a lender is forced to repossess and sell a home bought with a small deposit, it risks not being able to recoup its losses. If that loan is covered by LMI, the insurer will front any losses.

Often, the cost of LMI will be 'capitalised' – ergo, rolled into the home loan. This means the borrower may pay interest on the cost, bolstering its impact.

Lenders who offer low deposit home loans

Looking to buy a home with a small deposit? These home loans are available to borrowers with deposits of less than 20%:

Important Information and Comparison Rate Warning

What is a loan-to-value ratio (LVR)?

Shopping around for home loans? You've probably come across the acronym 'LVR', or loan-to-value ratio.

Your LVR represents the size of your deposit compared to the value of your home or dream home.

Buying a $500,000 property with a $50,000 deposit would mean your LVR is 90%.

The lower your deposit, the higher your LVR – and the greater the lender's perceived risk.

Can you buy a home with a 5% or 10% deposit?

Yes, it is possible to buy a home with a 5% or 10% deposit. In fact, most lenders these days offer home loans to borrowers with LVRs of 90% (ergo deposits of 10%).

If you only have a 5% deposit, it might be a little tricker to find a suitable home loan – but not by much. Many lenders advertise 95% LVR mortgages, though you might struggle to secure a competitive interest rate.

But wait! If your deposit just scrapes in at 5% or 10% and your ideal home loan has a strict 95% or 90% LVR limit, it's important that you also factor in the other costs associated with buying a home.

Stamp duty, for instance, can add up to tens of thousands, while LMI may cost thousands and conveyancing fees typically range from a few hundred to over $1,000. Be aware of how much of your savings might get eaten up by these costs and how much will be left over to actually use as a deposit.

First home buyer schemes: Support to buy with a smaller deposit

If you're purchasing your first home or you're a single parent, you might be able to buy a home with a deposit as small as 2% without paying for LMI, thanks to the Home Guarantee Scheme.

The federal government scheme encompasses three guarantees:

• The First Home Guarantee
  Helps eligible first home buyers enter the market with deposits of 5-20%

• The Regional First Home Guarantee
  Helps eligible first home buyers enter the market in regional Australia with deposits of 5-20%

• The Family Home Guarantee
  Helps eligible single parents purchase a home with deposits of 2-20%

Under the Home Guarantee Scheme, the federal government essentially acts as a guarantor for up to 15% or 18% of eligible borrowers' home loans. Thus, it protects their lenders from risks associated with higher LVR home loans and allows borrowers to dodge LMI.

There's also the Help to Buy scheme. This will see the federal government chipping in up to 30% of the cost of an existing home or 40% of the cost of a new home and receiving an equal ownership stake. A buyer can then take out a smaller home loan and can choose between buying the government out over time or handing over a portion of the proceeds when they sell equivalent to its stake.

Some states run their own shared equity schemes, so it's worth checking for local options.

Can you get a home loan without a deposit?

It's also possible to take out a mortgage to buy a home without a deposit. There are two ways to do so: Using a guarantor or taking out a deposit loan.

What is a home loan guarantor?

A home loan guarantor is usually a close relative – often a parent – who offers up one of their own assets (typically equity in their property) as security for someone else's home loan. If the borrower can't keep up with repayments, the lender can pursue the guarantor for the debt, and in some cases, repossess the guarantor's asset to recover the loss.

First home buyers commonly use guarantors to avoid paying for LMI. However, guaranteeing another person's home loan can present a serious financial risk and isn't a commitment to take on lightly.

What is a deposit loan?

A deposit loan is a separate loan taken out alongside a traditional mortgage to help cover a home's deposit. It usually comes with a much higher interest rate than a standard home loan and often needs to be repaid within just a few years, compared to the decades-long lifespan of a typical mortgage.

Both the deposit loan and the main mortgage typically require repayments from the get-go.

While deposit loans can help some buyers get into the property market sooner, they're not suitable for everyone. They can place borrowers under significant financial pressure and may lead some to buy homes well beyond their means.

Low deposit home loans: Benefits and risks

While low deposit home loans can offer a way into the market for those struggling to get a 20% deposit together, they can also present risks to both the homeowner and their lender.

Pros of low deposit home loans

• Help buyers enter the housing market and start building equity faster
  This is particularly beneficial when property prices are rising quickly, as buyers can get into the market before prices potentially rise further.

Cons of low deposit home loans

• Smaller deposit = larger debt
  Buying a home with a small deposit means taking on a larger debt and paying interest on the portion of the home's value that would traditionally make up a deposit.

• Higher interest rate = larger repayments
  Low deposit home loans generally have higher interest rates, which will mean larger monthly repayments.

• More rigorous approvals process
  It can take longer to be approved for a low deposit home loan and the lender may demand more extensive documentation to prove you're able to repay the loan.

• Lenders Mortgage Insurance (LMI)
  Borrowers with a deposit of less than 20% will be required to pay for LMI, which can add up to thousands of dollars, to protect the lender in case of default.

• Risk of mortgage stress
  There is a higher risk of experiencing mortgage stress due to taking on such a big loan.

• Risk of negative equity
  Buyers purchasing with a small deposit might be more vulnerable to falling into negative equity (when their home's value is less than what they owe on their mortgage) if the property market slips.

• High rates, fewer features, or worse terms
  Some lenders may offer fewer loan options, higher interest rates, or less favourable terms for those taking out low deposit home loans.

Alternatives to low deposit home loans

While low deposit home loans offer a faster path to homeownership, they often come with long-term costs – including higher interest rates and capitalised LMI. If you're set on entering the market, a low deposit loan might still be the right option for you.

However, there are several alternative strategies worth considering:

Strategy	Details
Keep saving for a deposit	By diligently saving for a larger deposit, you'll reduce the amount you need to borrow. This could mean lower repayments and less interest paid over time but will take longer and property prices could rise in the meantime.
Take advantage of government schemes	The likes of the Home Guarantee Scheme and various shared equity schemes can help eligible buyers enter the market with smaller deposits – without paying LMI.
Consider buying something cheaper	Your first property probably won't be your forever home. Consider buying a smaller house, an apartment, or in a less desirable location. That could see you starting to build equity, which can help you upgrade later.
Find a home loan guarantor	If a close relative is willing to act as guarantor, you may be able to buy with a smaller deposit (or even without a deposit) and avoid LMI altogether.
Team up with a partner or friend	Buying with someone else could boost your deposit, increase your borrowing power, and help you access more competitive loan terms.
Consider rentvesting or nestvesting	Some first home buyers purchase an investment property while continuing to rent or live at home. It's a way to build equity even if they can't yet afford a home that suits their lifestyle.
Utilise existing equity	If you already own a property, you might be able to use the equity in it as a deposit for your next purchase – such as an investment property.
Ask for a gift or early inheritance	If a parent or family member can gift you money or pass on an early inheritance, their support could help fund your deposit. Most lenders will require a gift letter or statutory declaration confirming the money doesn't need to be repaid.

_{Article originally written by Emma Duffy. Last updated by Brooke Cooper in 2025.}

_{Image by Zachary Kadolph on Unsplash}