Low deposit home loans

Lenders Mortgage Insurance (LMI) Explained

Lenders Mortgage Insurance is a one-off insurance premium charged when you borrow more than 80% of a property's value, that is, when your deposit is less than 20%. Despite its name, LMI protects the lender, not you. If you default on your loan, the insurer reimburses the lender for any shortfall after the property is sold. The insurer may then seek to recover that amount from you.

What LMI costs

LMI is calculated based on two factors: your loan-to-value ratio (LVR) and the total loan amount. The higher your LVR and the larger your loan, the more expensive LMI becomes. On a $700,000 property with a 10% deposit ($70,000), LMI might cost approximately $10,000 to $15,000. With a 5% deposit ($35,000) on the same property, LMI could be $20,000 to $30,000.

Paying it upfront or adding it to the loan

LMI can be paid upfront as a lump sum, or capitalised (added) into your loan. Capitalising LMI means you do not need the cash immediately, but you will pay interest on it over the life of your loan, increasing the total cost.

For some buyers, paying LMI and getting into the market sooner is a better financial outcome than waiting years to save a 20% deposit while property prices continue to rise.

Government Schemes for Low Deposit Buyers

The Australian Government offers several schemes specifically designed to help buyers enter the property market with a smaller deposit. These schemes can save you tens of thousands of dollars by eliminating LMI or providing direct financial support.

Australian Government 5% Deposit Scheme (formerly the First Home Guarantee)

Full guides: the 5% Deposit Scheme, single parent home loans and Help to Buy.

The Australian Government 5% Deposit Scheme (formerly the Home Guarantee Scheme and First Home Guarantee) is the most widely used government scheme for low deposit buyers. It allows eligible first home buyers to purchase a property with just a 5% deposit without paying LMI. The government guarantees the difference between your deposit and 20% of the property value.

To be eligible, you must be an Australian citizen aged 18 or over and the property must be within the price cap for your area. There is no income test and no annual place limit; the previous income caps ($125,000 single, $200,000 combined) and the 35,000-place annual cap were removed on 1 October 2025. Property price caps range from $1.5 million in Sydney to $500,000 in some regional areas.

Single parents: the 2% deposit stream (formerly the Family Home Guarantee)

The single parent stream of the 5% Deposit Scheme is specifically designed for eligible single parents and single legal guardians of at least one dependent child. It allows a purchase with as little as a 2% deposit without paying LMI. The government guarantees up to 18% of the property value. Places have been uncapped since 1 October 2025.

Unlike the 5% Deposit Scheme, you do not need to be a first home buyer. If you previously owned property but sold it due to a relationship breakdown, you may still be eligible. The income cap that previously applied was removed in October 2025; the property must be within the applicable price cap.

Help to Buy Shared Equity Scheme

Help to Buy is a shared equity scheme where the government contributes a portion of the purchase price in exchange for an equivalent share in the property. For new homes, the government contributes up to 40% of the purchase price. For existing homes, it contributes up to 30%. You need a minimum deposit of just 2%.

Bank Australia publishes income thresholds of $103,000 a year for individuals and $165,000 for joint applicants and single parents, wage-indexed annually. You own the home, live in it, and are responsible for maintenance and rates. Over time, you can buy back the government's share in minimum increments of 5%. If you sell the property, the government receives its percentage share of the sale proceeds.

Guarantor Home Loans

A guarantor home loan allows you to borrow more than you could on your own by using a family member's property as additional security. The guarantor does not give you money or make your repayments, they simply allow their property to be used as a guarantee for a portion of your loan. This can enable you to borrow up to 100% of the property value, or even slightly more to cover stamp duty and other costs, without paying LMI.

How the guarantee is limited and released

The guarantee is typically limited to 20% of the property value, meaning only a portion of the guarantor's property is used as security. Once your loan-to-value ratio drops below 80%, through a combination of repayments and property value growth, you can apply to have the guarantee released, freeing the guarantor's property from any obligation.

Who can be a guarantor

Most lenders require the guarantor to be an immediate family member (parent, sibling, or grandparent) and to own their property with sufficient equity. The guarantor should obtain independent legal and financial advice before agreeing to the arrangement. If you default on the loan, the lender may be able to sell the guarantor's property to recover the guaranteed portion. The guarantor home loans guide covers the rest.

5% Deposit Options Without Government Schemes

Even without government schemes, many lenders will approve a home loan with a 5% deposit. In this case, LMI will apply, but the cost can be capitalised into the loan. Some key considerations for a 5% deposit loan include:

• Genuine savings: Most lenders require at least 5% genuine savings, meaning the money has been accumulated over at least three months. Gifts from family are usually acceptable but may need to be verified.
• LMI cost: On a $600,000 property, LMI with a 5% deposit typically costs between $15,000 and $25,000, depending on the insurer and lender.
• Interest rate premium: Some lenders charge a slightly higher rate for high-LVR loans, typically 0.1-0.3% above their standard rate.
• Additional costs: Budget for stamp duty (unless exempt as a first home buyer), conveyancing, building inspections, and moving costs on top of your deposit.

Shared Equity Schemes

Beyond the federal Help to Buy scheme, some state governments offer their own shared equity programs. These schemes allow you to purchase a property with a smaller mortgage because the government co-owns a share of the home. Your repayments are lower because you are only borrowing your share of the purchase price.

In Victoria, the Victorian Homebuyer Fund contributes up to 25% of the purchase price for eligible buyers (or 35% for Aboriginal and Torres Strait Islander buyers). In Western Australia, Keystart Home Loans offers shared ownership arrangements with low deposits and no LMI. Each state scheme has its own eligibility criteria, property caps, and buy-back provisions.

Pros and Cons of Low Deposit Home Loans

Buying with a low deposit offers clear advantages but also carries risks that you should weigh carefully before committing.

Advantages

• Enter the property market sooner rather than waiting years to save 20%
• Benefit from property price growth while you own rather than while you save
• Government schemes can eliminate LMI, making the total cost comparable to a higher deposit
• Start building equity and working towards outright ownership earlier
• Stop paying rent sooner and redirect those payments towards your own asset

Disadvantages

• LMI can add $10,000 to $40,000 to your loan costs if you do not qualify for a waiver
• Higher monthly repayments due to a larger loan amount
• Risk of negative equity if property values decline in the short term
• Less borrowing power compared to buyers with a larger deposit
• Some lenders restrict property types for high-LVR loans (e.g. inner-city apartments)

Eligibility Requirements

Eligibility for low deposit home loans depends on both the lender's criteria and any government scheme you are applying through. General requirements include stable employment (typically six months or more with your current employer), a clean credit history with no defaults, and the ability to demonstrate genuine savings.

Income must be sufficient to service the loan at the buffered assessment rate, and your total debt-to-income ratio must fall within the lender's acceptable range.

For government schemes, additional criteria apply including Help to Buy's income thresholds, property price limits, citizenship requirements, and in some cases, restrictions on whether you have previously owned property. A mortgage broker can assess your eligibility across all available schemes and recommend the best pathway for your circumstances.