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How does low deposit home loans work?



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Q: What is a low deposit home loan?

A: A low deposit home loan is a type of home loan that allows borrowers to purchase a property with a deposit that is less than 20% of the property’s purchase price. This type of loan is designed for borrowers who have limited savings or are first-home buyers.

Q: How does a low deposit home loan work?

A: Low deposit home loans work in a similar way to traditional home loans. However, because the deposit is lower, there are some additional factors that you’ll need to consider.

  1. Lenders Mortgage Insurance

If you have a deposit that is less than 20% of the property’s purchase price, you’ll be required to pay Lenders Mortgage Insurance (LMI). LMI is a one-off insurance premium that protects the lender in case you default on your loan. The cost of LMI varies depending on the lender and the size of your deposit, but it can add thousands of dollars to your loan amount.

  1. Higher interest rates

Low deposit home loans often come with higher interest rates than traditional home loans. This is because lenders see low deposit borrowers as higher risk, and therefore charge a higher interest rate to compensate for that risk.

  1. Deposit requirements

Different lenders have different requirements when it comes to low deposit home loans. Some lenders may require a minimum deposit of 5%, while others may require a minimum of 10%. It’s important to shop around and compare different lenders to find the best option for your financial situation.

  1. Government schemes

The Australian government offers a range of schemes to help first-home buyers enter the property market. One of these is the First Home Loan Deposit Scheme, which allows eligible borrowers to secure a home loan with a deposit as low as 5% without paying LMI. Other schemes include the HomeBuilder scheme and the First Home Owner Grant.

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