Homebuyers' Guide to Low-Deposit Home Loans in Melbourne
House prices remain a key concern for many, especially for first-time buyers.
But here’s the good news: low-deposit home loans, which allow you to buy a home with a smaller deposit, can make owning a home in Melbourne possible sooner than you think. And with the expertise of a skilled mortgage broker , you can find the right loan tailored to your financial situation, making the entire process smoother and more manageable.
In this guide, we'll cover everything you need to know about low-deposit home loans, including deposit requirements, government schemes, and lenders mortgage insurance (LMI). Plus, we’ll share a case study to show how it all works in real life.
What is a low-deposit home loan?
So, what exactly is a low-deposit home loan? Simply put, it’s a type of loan that allows you to purchase a home with a smaller deposit than what’s typically required.
Standard home loans often ask for a 20% deposit. However, with low-deposit loans, you could be looking at putting down as little as 5%, or even less in some cases.
Why choose a low-deposit loan?
Opting for a low-deposit loan can be a strategic move, especially if property prices in Melbourne continue to rise. Getting into the market sooner with a smaller deposit could potentially save you money in the long term, even if it means paying the lenders mortgage insurance (LMI).
Before diving into the process of applying for a low-deposit home loan, it’s worth understanding the key advantages it could offer. Below, we outline the main benefits that can make a significant difference in your home-buying journey.
Benefits of low-deposit home loans:
- Get into the market sooner: You can purchase your home earlier rather than waiting until you have saved a 20% deposit, potentially benefiting from rising property prices.
- Lower initial outlay: Reduced deposit requirements mean you need less upfront cash, leaving more funds available for other expenses like stamp duty or home improvements.
- Flexible options: Some schemes for first-home buyers offer flexibility in repayment terms or the ability to combine with other financial assistance programs, helping tailor the loan to your needs.
- Increased borrowing power: You might be able to borrow more than you could with a standard loan, giving you access to a broader range of properties.
Eligibility criteria for low-deposit home loans
If you're considering a low-deposit home loan in Melbourne, it's crucial to know what lenders will be looking for in your application. Below, we’ve outlined the key eligibility criteria that you’ll need to meet.
- Minimum deposit: Most lenders in Melbourne require a deposit of at least 5%, though some might prefer a higher amount depending on your credit history.
- Credit score and history: A good credit score is essential. Lenders will closely review your credit file to ensure you have a strong repayment history, with minimal defaults or late payments.
- Stable income: You must demonstrate a stable income, often through consistent employment for at least six months. Self-employed applicants will need to provide tax returns and financial statements.
- Borrowing power: Lenders assess your borrowing capacity based on your income, living expenses and any other existing debts, such as credit cards or personal loans.
- Australian citizenship or residency: To qualify for most low-deposit loans, you must be an Australian citizen or permanent resident.
- Property price caps: Some government-backed schemes in Melbourne have property price caps, often around $800,000, so your chosen property must fall within these limits.
- Government scheme eligibility: If you're applying for assistance through programs like the First Home Guarantee, you’ll need to meet specific income limits and other criteria set by the scheme.
- Additional security: In some cases, lenders may require additional security, such as a guarantor or equity in another property, especially if the loan is considered high-risk.
- Location requirements: The property you intend to buy must be within the Melbourne metro area or specified regional zones to qualify for certain low-deposit loans.
Types of low-deposit home loans available in Melbourne
When considering a low-deposit home loan in Melbourne, it’s important to understand the variety of options available to you.
First Home Guarantee
This government-backed first home guarantee scheme allows eligible first-time buyers to purchase a home with as little as a 5% deposit without paying LMI. The Australian Government guarantees the difference, making it a popular choice for Melburnians looking to enter the market.
Family Home Guarantee
Specifically designed for single parents, this family home guarantee scheme requires just a 2% deposit. The Australian Government covers the LMI, helping single parents achieve home ownership even if they have limited savings. This option is available for both first-time buyers and previous homeowners who no longer own property.
Lender-specific low-deposit products
Several banks and lenders in Melbourne offer their own low-deposit home loans, often requiring as little as a 5% deposit. These products typically come with LMI costs, but some lenders may waive fees or offer special rate home loan packages to certain borrowers, such as some eligible professionals in the healthcare industry.
Key worker home loan schemes
Melbourne has a range of special loan schemes available for key workers such as home loans for nurses, teachers and emergency service personnel. These schemes often feature reduced deposit requirements, lower interest rates, or waived LMI to support those in essential roles.
Guarantor home loans
If you’re struggling to meet the deposit requirements, a guarantor home loan might be an option. With this type of loan, a close family member can use their property as additional security, allowing you to borrow more with a smaller deposit.
Homebuyer fund
The Victorian Homebuyer Fund enables eligible first-home buyers to purchase property with as little as a 5% deposit, and the Victorian Government contributing up to 25% of the purchase price in exchange for the equivalent in shared equity. You then pay the Government back. Eligibility criteria apply.
House and Land Package Loans
For those looking to build in Melbourne, some lenders provide low-deposit loans specifically tailored for house and land packages. These loans often require a minimum deposit of 5%, and can be structured to fund the construction in stages.
Case Study: Georgia’s Journey to Her First Home in Melbourne
To bring this guide to life, let’s look at an example. Georgia, a 28-year-old, had been renting in Melbourne for years. With property prices on the rise, she decided it was time to buy her first home. But with only $35,000 saved, she was well short of the typical 20% deposit for a $600,000 property.
Georgia’s plan
After speaking with a mortgage broker, Georgia discovered that she could apply for a low-deposit home loan with just a 5% deposit if she paid LMI. This meant she only needed $30,000, leaving her with enough to cover additional costs like the application fee and conveyancer costs, thanks to some strategic planning and budgeting.
The loan application process
Georgia’s loan application was straightforward, but it involved several steps:
1. Pre-approval: First, Georgia got pre-approval from a lender, which gave her a clear idea of her borrowing capacity and the loan amount she could secure.
2. Finding a property: With pre-approval in hand, Georgia focused on finding a home within her budget.
3. Formal approval: Once Georgia made an offer on a home, her mortgage broker helped her finalise the loan application. The lender then conducted a property valuation before granting formal approval.
4. Loan settlement: Finally, after all paperwork was signed, the loan settlement took place, and Georgia officially became a homeowner.
Outcome
By choosing a low-deposit loan, Georgia was able to enter the property market sooner. Although she had to pay LMI, the increase in Melbourne’s property prices meant that her home appreciated in value within a year, more than covering the cost of the LMI.
FAQs
What is the minimum deposit required for a low-deposit home loan?
Most low-deposit home loans require a minimum deposit of 5%, though some lenders might ask for more, depending on your financial situation.
Do I have to pay lenders mortgage insurance (LMI) on a low-deposit home loan?
In many cases, if your deposit is less than 20%, LMI is typically required. However, some government schemes may cover this cost for eligible buyers or some lenders may waive LMI for people in certain professions.
How do government schemes help with low-deposit home loans?
Government schemes like the First Home Guarantee allow you to purchase a home with a smaller deposit by waiving the LMI, reducing your upfront costs.
Can I use a low-deposit loan to buy an investment property?
While it’s possible, lenders generally have stricter criteria for investment properties. A higher deposit may be required, and LMI costs can be higher. If you currently own a property, it is possible you have equity, which could go towards your deposit.
What are the upfront costs involved in buying a home?
Upfront costs typically include the deposit, LMI, stamp duty and various fees like application and legal fees. These can add up to 7% to 10% of the property purchase price.
How does my credit score affect my eligibility for a low-deposit home loan?
A higher credit score increases your chances of approval. A poor credit history might require a larger deposit or additional security.
Final thoughts on low-deposit home loans
Entering the property market with a low-deposit home loan could be an option for many Melburnians. With the right guidance, it’s possible to find a loan solution that fits your needs, even with a smaller deposit.
By understanding the basics, meeting the eligibility criteria, and managing your upfront costs, you can make informed decisions and confidently take the first step toward home ownership.
Talk to a Loan Market Connect broker today to find the right option for you.