Buying a Home With 5% Deposit Home Loans

September 28, 2023
5% deposit home loans

Key takeaways:

  • 5% deposit home loans are becoming increasingly popular in Australia as they allow buyers to purchase a home with a smaller down payment.
  • There are a variety of government and private loan options available for buyers looking to purchase a home with a 5% deposit.
  • While 5% deposit home loans can make buying a home more accessible, buyers should be aware of the potential risks and should consider the long-term affordability of the loan before making a decision.

Looking for more info on 5% deposit home loans? We don’t blame you. Property financing is difficult. You must consider various factors and arrange funds.

Most home loan providers require a 20% deposit, which is a big investment that most home buyers find difficult to pay. For this reason, people want to know how to get home loans with smaller deposits.

These loans have a lower upfront cost and are suitable for those home buyers who don’t have a lot of funds to buy a home. This post will uncover more about buying a home with 5% deposit home loans.

What is a 5% deposit home loan?

A 5% deposit home loan is one in which you pay only 5% of the home’s total purchase price.

These loans are also called 95% loan-to-value (LTV) mortgages. In these mortgages, you borrow 95% of the home’s purchase price and pay only a 5% deposit. 

For instance, if you buy a home worth $300,000. A 5% home deposit means you’ll have to pay $15,000 and take a home loan for the rest, that is, $285,000. Thus, with the help of a low-deposit home loan, you can purchase a $300,000 property by paying only $15,000.

That way, according to the agreement, you only have to pay the remaining mortgage to the lender over 15, 20, or 30 years. This is how 5% deposit home loans work.

5% deposit home loans

How to find a 5% deposit home loan?

5% deposit home loans are more difficult to find. However, some lenders offer such loans. Besides that, home buyers can also consider government home buyer assistance schemes that come with 5% deposits. The following are the three main schemes offered as low-deposit loans by the government:

First home loan deposit scheme (FHLDS)

First Home Loan Deposit Scheme or First Home Guarantee allows first-time home buyers to own a home with a 5% deposit. This scheme also allows the borrowers to purchase a home without paying the Lender’s Mortgage Insurance (LMI). A homeowners grant allows first-home buyers to build or buy new properties and use them as their primary residence.

Guarantor home loan (GHL)

5% deposit home loans

A Guarantor Home Loan allows the borrower to have a guarantor who can repay the loan. The guarantor can be anyone, such as a family member or friend, who can pay back the home loan of the borrower if the borrower can’t. Since property prices are high, borrowers who can’t make big payments can have a guarantor and purchase a home. 

Family home guarantee (FHG)

Family Home Guarantee (FHG) scheme supports single parents in buying a home. In the case of a single parent, the parent doesn’t need to be a first home buyer, and they can also benefit from flexible home loan repayments. This plan enables the borrower to bypass Lender’s Mortgage Insurance (LMI) payments.

How to qualify for a first home guarantee?

The Australian government introduced different home loan schemes for eligible first-home buyers. However, a lending criterion is used to identify people benefitting from the scheme. To be eligible, you must:

  • Be an Australian citizen and 18 years or above
  • Be a genuine first-home buyer
  • Have a good credit history
  • Not own any property in Australia before
  • Show that you have at least 5% genuine savings to purchase the property

Pros and cons of 5% deposit home loans

5% deposit home loans

Here are the pros and downsides of buying a home with 5% deposit home loans:

Pros of 5% deposit home loans

  • The small upfront cost to purchase a home: This benefits those who don’t have huge funds to purchase a house. They can pay a small amount and take out a loan for the remaining amount. 
  • You can own a home sooner and then save later to repay the loan. With 5% deposit home loans, you can immediately take possession of a new home and repay the loan in instalments.
  • There are government assistance schemes that help you with 5% deposits. The Australian government helps first-home buyers, eligible single parents, and other people who cannot buy their own homes.

Cons of 5% deposit home loans

  • The interest rate is higher because the loan amount is huge. The lender takes more risk in providing funds because the borrower has paid only a 5% deposit. To reduce the risk, the lenders charge a higher interest rate.
  • Smaller deposits result in longer mortgage terms. Since you have a home loan balance of 95% of the home’s purchase price, it will take longer to pay back.
  • You owe more to the lender because you’ve paid only a small amount. This means that you have to make larger monthly repayments.
  • You have less equity in the home since you have paid only 5%. This means that you have only 5% equity in the home and a 95% home loan balance.

irst Home Guarantee and Other Schemes

5 deposit home loans

The Australian government has introduced several schemes to support first home buyers, one of which is the First Home Guarantee Scheme.

This scheme is a cornerstone for those seeking to buy their first home, offering a government guarantee that allows eligible buyers to purchase a home sooner with a smaller deposit, without paying Lenders Mortgage Insurance (LMI).

In addition to the First Home Guarantee, there are other schemes like the Family Home Guarantee and the New Home Guarantee, designed to aid different demographics of home buyers.

These schemes are instrumental in fostering home ownership, providing varied options to suit the diverse needs of the Australian population.

By leveraging these schemes, prospective homeowners can navigate the property market more efficiently, aligning their choices with their unique circumstances and preferences.

Wrapping up on 5% deposit home loans

Buying a home with 5% deposit home loans depends on various factors such as your financial condition and urgency to buy a home.

Plus, it also depends on the housing market condition in the area where you have decided to purchase a home. With smaller deposits, you will have a reduced upfront cost.

On the other hand, with larger deposits, you’ll benefit from smaller monthly repayments. A mortgage broker can assist you in making the best decision for purchasing a home.

FAQs on 5 Deposit Home Loans

What are 5 deposit home loans, and who are they for?

5 deposit home loans are financial instruments allowing prospective homeowners, particularly first home buyers, to secure a home with a deposit as low as 5%. They are designed to lower the entry barrier for those seeking to purchase their first home.

How do 5 deposit home loans benefit first home buyers?

5 deposit home loans significantly reduce the initial financial burden associated with purchasing a property, making home ownership more attainable.

They allow buyers to start building equity sooner and, when coupled with schemes like the First Home Guarantee, can offer protection against Lenders Mortgage Insurance (LMI).

How can one apply for a 5 deposit home loan, and what are the eligibility criteria?

Eligible first home buyers can apply for these loans through participating lenders or mortgage brokers, adhering to specific requirements set by the Australian government. The application process involves a thorough assessment of financial standing, including income, credit history, and debt levels.

What are the considerations and challenges associated with 5 deposit home loans?

While beneficial, 5 deposit home loans mean larger loan amounts and potentially higher monthly repayments. Applicants must assess their financial capability to manage increased loan repayments and understand the terms, conditions, and any associated costs to avoid unforeseen complications.

Are there any government schemes associated with 5 deposit home loans?

Yes, the Australian government has introduced several schemes, such as the First Home Guarantee Scheme, to support first home buyers. These schemes allow eligible buyers to purchase a home sooner with a smaller deposit and offer protection against Lenders Mortgage Insurance (LMI).

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