Zero deposit home loans

It won't come as a shock, but house and apartment prices in Australia are expensive. According to 2020 research from insurance provider Budget Direct, the median national property price is $549,918 and in cities like Sydney and Melbourne that figure is far higher.

Based on that $550,000 figure, a first home buyer looking to save up the recommended 20% deposit to buy a home would need to save up a whopping $110,000 - not mean feat.

There are other options available, including low deposit home loans and even zero deposit home loans (if you have a family guarantor) which could allow you to get into the property market sooner. So let’s discuss the difference between the two.

Low deposit home loans

Some home loan providers allow first home buyers to borrow up to 95% of the property value. This is called a low deposit loan because you have a deposit under the recommended 20%. So, using that median property price of $550,000 as an example again, instead of needing to save up the not inconsiderable sum of $110,000 for a 20% deposit you would only need $27,500 with a 5% deposit.

If you’re purchasing your first property as an investor, keep in mind you may not be eligible for a low deposit loan, as many lenders only offer 5% deposit loans to owner occupiers (i.e people who are going to live in the home they buy).

Well that sounds easier, right? Yes, but there are a few things to keep in mind.

Lenders mortgage insurance

First of all if you’re going to take out a low deposit home loan, you’ll likely be charged lenders mortgage insurance (LMI). LMI can cost thousands or even tens of thousands of dollars, and it's scaled, so the more you borrow the higher your insurance cost will be. A common misconception is that lenders mortgage insurance is a protection for borrowers in the event they get behind on their repayments, but it's actually to cover the lender if a borrower forfeits on the loan.

One way you can avoid the cost of lenders mortgage insurance is by asking your parent/s or a family member to be a guarantor on your loan, which means they will put up a portion of their own home as security. First time investors may be happy to hear that if they can organise a parental guarantor then they may be able to take out a loan with a low deposit.

A second option is the Federal Government's First Home Loan Deposit Scheme (FHLDS). Under the scheme eligible first home buyers with a deposit of at least 5% can avoid paying LMI when taking out a home loan (with participating lenders), as the government will provide a guarantee for the remaining deposit requirement of the home loan (up to 15%). 

Interest rates

Another factor to consider if that lenders tend to charge a rate premium on loans with higher loan-to-value ratios. Very quickly, the loan-to-value ratio (LVR) is used by lenders to assess how risky you are as a borrower - so a higher LVR would indicate that a borrower has a lower deposit or existing equity in the property e.g. if you were purchasing with a 10% deposit you'd be borrowing 90% of the home's value so your LVR would be 90%.    

There's no set formula all lenders follow in terms of the interest rates they charge in relation to LVR, but the most competitive rates on offer tend to be for borrowers with an LVR below 80%, or even 60% in some cases. But given that even a difference of a few basis points could have a sizeable impact on the amount of interest you pay over the life of the loan, it's certainly a factor you'll want to think about. 

Zero deposit home loans

Now let’s run through zero deposit home loans, otherwise known as no deposit loans. Before the Global Financial Crisis (GFC), some banks and other lenders allowed first home buyers to take out a home loan without a deposit, but these days the only way you can apply for a zero deposit home loan and borrow 100% of the property price is if you have a parent or family member willing to go guarantor on the mortgage

The reason home loan providers allow you to borrow without a deposit if you have a guarantor is because they know if you are unable to meet your home loan repayments and you forfeit on the loan, any money they can’t recover through selling your property can be taken from the portion your guarantor put up as security. That’s why guarantor loans can be risky.

An alternative option is for your parents to help you with the deposit. For example, you could aim to save 5% and your parents could give you the additional 15% to make up a 20% deposit.

What costs should I budget for?

While zero deposit home loans taken out with a guarantor could allow you to get into the property market without a deposit, there are still plenty of other costs associated with purchasing a property. Here are some of the common ones:

Stamp duty: Charged by your state or territory, the cost of stamp duty can be significant and, unlike lenders mortgage insurance that can be added to your home loan amount, stamp duty must be paid upfront. For instance our stamp duty calculator shows that if you’re a first home buyer purchasing an existing property in Queensland to live in worth $550,000, you will be charged $10,600 in stamp duty.

Upfront mortgage fees: Many home loan providers charge upfront fees for processing your mortgage application. These could include an application fee, legal fee, settlement fee and a valuation fee which could range anywhere between a few hundred dollars to well over $1,000.

Ongoing fees: On top of paying interest, you may also have to pay a monthly or annual service fee which the provider charges for any administration costs associated with your home loan.

Break cost fee: Commonly charged on fixed rate loans, a break cost fee could be charged if you try to switch loans within the fixed rate term.

What kind of home loans can I get with a zero deposit loan?

The great thing about zero deposit loans taken out with a guarantor is that you can still choose the type of home loan that suits you. Here are some things to think about:

Fixed vs variable: Do you want to lock in your interest rate, so your repayments stay the same for a few years? Then a fixed rate home loan could be your borrowing match. Alternatively, are flexible features like an offset account, extra repayments or a redraw facility high on your priority list? Then a variable rate loan might be your best bet.

Interest only: The first few years of repaying your home loan could be financially tight, so a common choice for first home buyers is choosing to repay just the interest on the loan for the first few years. While this will lower your repayments significantly, it’s important to remember that you will have to start paying down both the principal and the interest after the introductory interest only period comes to an end.

Tips for getting approved for a home loan

1. Check your borrowing power: Make sure you check that you can comfortably service the loan, even if there is a rate rise, by punching in your numbers into our borrowing calculator.

2. Prove your savings credentials: Finding a guarantor may mean you can take out a home loan with a zero deposit, but you'll still need to show that you can service the loan on your own. Lenders will want to see proof of genuine savings by looking at around three months worth of account statements, so one way to ensure you’re always putting away money is by setting up a requiring transfer to your savings account on payday.

3. Clear any debt: As part of the application process, home loan lenders will look over any existing debt you have - whether that's on a credit card, or via a personal loan or car loan. Given that outstanding debt could impact your ability to get a loan, it may be a wise idea to tackle this before applying for a home loan.

4. Reduce your credit card limit: Even if you don't have an outstanding balance, any credit you can draw on will be taken into consideration when a lender is assessing you for a home loan. So the lower your credit card limit is, the better.

5. Keep your life consistent: Changing jobs or purchasing an expensive item before applying for a home loan could be a red flag to a lender, so in the months prior to applying for a loan it could be a good idea to keep things consistent by staying with your current job and avoiding any big purchases.

Navigating the property and home loan maze can be confusing, so if you've got any more questions or you're after more information then a great place to start is at our dedicated first home buyers hub where we run through all the major must-knows when it comes to purchasing your first home with a range of guides and tips.

If you’re at the stage of comparing home loan deals though, our first home loan comparison table is a great place to compare rates, fees and features all in the one place. Or get started immediately by checking out some of the great offers below.

Low deposit home loans - rates updated daily

Search promoted home loans below or do a full Mozo database search. Advertiser disclosure.
  • placeholder
    Mozo Experts Choice 2021
    Well Balanced

    Owner Occupier, Principal & Interest, LVR <90%

    interest rate
    comparison rate
    Initial monthly repayment
    2.52% p.a. variable
    2.55% p.a.

    A great value low rate home loan for variable owner occupiers. Free extra repayments and free redraw facility. No ongoing fees. Option for a split account available. Up to 90% LVR. Winner of the Offset Home Loan Expert's Choice Award for 2021.

    Go to site
    Details
  • placeholder
    Back to Basics Special

    LVR<90%, Owner Occupier, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    2.59% p.a. variable
    2.60% p.a.

    No monthly account keeping fee, no ongoing annual fee and no loan establishment fee on new lending of $150,000 or more. Get a $2,000 cash bonus when you refinance with an eligible Suncorp Bank Home Loan of $250k+. T&Cs & eligibility criteria apply. Minimum 10% deposit.

    Go to site
    Details
  • placeholder
    Fixed Home Loan Special Offer

    Owner Occupier, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    2.09% p.a.
    fixed 3 years
    2.93% p.a.

    No monthly account keeping fees & No loan establishment fee. Get up to $3,000 cash bonus when you refinance with an eligible Suncorp Bank Home Loan. T&Cs & eligibility criteria apply.

    Go to site
    Details
  • placeholder
    Mozo Experts Choice 2021
    Well Balanced

    Investor, Principal & Interest, LVR <90%

    interest rate
    comparison rate
    Initial monthly repayment
    2.87% p.a. variable
    2.90% p.a.

    Low variable rate home loan for Investors up to 90% LVR with no ongoing fees, free extra repayments and redraw facilities. Winner of the Offset Home Loan Expert's Choice Award for 2021.

    Go to site
    Details
  • placeholder
    Green Home Loan

    Owner Occupier

    interest rate
    comparison rate
    Initial monthly repayment
    2.08% p.a. variable
    2.36% p.a.

    Great low rate on investment loans when you package with your owner-occupied loan.

    Go to site
    Details

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.