Buying a first home is not an easy task, especially when you need to save for that traditional setup of a 20% deposit. That’s where low deposit home loans become worthwhile. They are specifically designed to help first-home buyers step into the housing market earlier.
With government grants and schemes, they’re increasingly becoming popular pathways to homeownership in Australia. But they are subject to certain conditions, risks, and long-term commitments, which every buyer should understand before signing.
What Is a Low Deposit Home Loan for First Home Buyers?
In general words, a low deposit home loan is a type of loan by which you can buy your first home with less than a 20% deposit. Meanwhile, if you apply for some government grant like the First Home Guarantee Scheme, you can even buy with as little as a 2-5% deposit.
With a rising housing market and tough competition, this is a helpful option for first-home buyers to buy with a low deposit. But there is a downside to it, like you may need to pay LMI (Lender’s Mortgage Insurance).
That’s because, since your deposit is low, lenders can ask for it, as it’s the protection fee for themselves in case your home loan defaults. As a result, it can make the property expensive, adding thousands of dollars upfront with stamp duty. Despite this, its popularity is increasing, and the expanded 5% Deposit Scheme has further contributed to this growth.
Why First Home Buyers Benefit from Low Deposit Options
Not only 1 or 2, there are several benefits that you can get through with a low-deposit home loan, like
- Time Saving – You don’t have to wait for years to save a 20% deposit while property prices keep rising.
- Early Market Entry – You can enter the market early without any concern for a rising market.
- Government Support – With schemes like the First Home Guarantee or Family Home Guarantee, you can avoid paying LMI, saving tens of thousands.
- Build Equity – Though you started with a low deposit, you can still build high equity. Like on the property purchase of $500k, you can build equity of $50k with 10% growth over a few years.
- Lower Initial Savings – At the initial phase, you can start your property journey with the lowest deposit, thereby saving more upfront.
Types of Low Deposit Home Loans
Low deposit home loans come in different forms. Here are the main options –
Standard Low Deposit Home Loans
Most banks and lenders now offer home loans with deposits as low as 5–10% at LVR (Loan-to-value ratio) up to 95%. These loans are suitable for both owner-occupiers and investors who want to enter the property market sooner.
But, if your deposit is below 20%, lenders can charge Lenders Mortgage Insurance (LMI) to protect themselves in case of your loan default. Even then so, many people choose these loans because they give the flexibility to access traditional bank products with competitive interest rates.
Government-Backed Schemes
Then, there are government schemes that make low deposit lending even more accessible. Like, the First Home Guarantee Scheme starting October 1, 2025, will allow first home buyers to buy with as little as a 5% deposit without any LMI.
The best part is that this scheme is even supported by major lenders and Housing Australia. Another scheme is the Family Home Guarantee that targets single parents and enables them to buy with a deposit as low as 2% and avoid LMI.
Meanwhile, you can take advantage of the First Home Owner Grant, which is a one-time $10k grant from the government. But it also depends on the state you want to buy in, like if you buy in South Australia, you will get a $15k grant on new home purchases. So, you must consider while deciding in.
Other Non-Bank Loans
This is another type of low deposit home loan where some specialist lenders and non-bank providers cater to low deposit borrowers. Institutions like Virgin Money and Easy Street offer loans starting from just a 2% deposit with no LMI. They often have broader lending criteria compared to traditional banks, making them accessible to buyers who may not meet strict income or credit requirements.
At best, some even allow modular or off-the-plan home purchases and can integrate government grants with the deposit. So, as a first-home buyer, you can easily get multiple options to structure your financing effectively.
Risks for First Home Buyers Taking Low Deposit Home Loans and How to Handle Them
Although you can enter the housing market sooner with low deposit home loans, they come with unique risks that every first-home buyer should understand, like
Higher Repayments and Interest Costs
A smaller deposit means a larger loan, which directly increases your monthly repayments. That means, over the life of the loan, you will pay more interest compared to someone who contributed a larger deposit.
As a result, this can negatively impact your cash flow, making budgeting for everyday expenses, bills, and unexpected costs more challenging for you. But you can manage this by considering shorter loan terms, offset accounts, or by making extra payments through fortnightly, weekly, or monthly repayments.
LMI Costs
In case your deposit is below 20%, you also need to pay LMI, the major upfront cost when buying a first home. While government-backed schemes like the First Home Guarantee waive LMI, buyers should factor this in.
That’s because this is what adds thousands upfront and can make your loan more expensive. Meanwhile, it’s also important to consider that because lenders often see lower deposits as riskier and charge higher interest rates.
Limited Loan Options
You may get limited choices, as not all lenders offer these loans. And the lenders that provide them often apply strict lending criteria with limited flexibility to features like offset and redraw. They may keep a close eye on your income, spending habits, debts, and savings. This can even limit your borrowing capacity when applying.
But here is a way you can handle this, like clear up your debts, maintain a good credit history, and show your consistent savings. This will help you get loan approval soon.
Limited Flexibility
Despite low deposit home loans being a good option while managing finances, they still can reduce your flexibility. Like, after the loan settlement, you may not be able to invest in renovations, furniture, or other life goals.
And since this will be the early phase of your property journey, this can limit your refinancing options, too. Thus, buyers should plan their budgets carefully and build emergency savings before committing to this loan.
How to Handle These Risks
Although you cannot avoid these risks, but can manage them by considering the following measures, such as
- Buy well within your budget, without exceeding your maximum borrowing limit.
- Choose a property that is stable and in high-demand locations to reduce equity risk.
- Pay down personal debts before applying to improve approval chances, including your unused credit cards, too.
- Make use of available grants and guarantee schemes to cut all the unnecessary costs.
Minimum Deposit Requirements
Low deposit home loans give flexibility, but the minimum deposit requirement still depends on the type of loan and scheme you choose, like
- A 20% deposit is considered standard. It avoids Lenders Mortgage Insurance (LMI) and generally gives you the lowest interest rates. If you can save this, it’s the safest and cheapest option.
- A 10% deposit which is commonly offered by many lenders. While it reduces upfront saving requirements, LMI can still apply, and you need to consider this in your budget to avoid any uncertainty.
- A 5% deposit, which is now accessible through government-backed schemes like the First Home Guarantee. With this, you can enter the market faster while avoiding LMI costs.
- A 2% deposit, which is available through programs like the Family Home Guarantee or specialist lenders like Easy Street or Virgin Money. These are targeted at specific groups, so the single parents or buyers who meet special eligibility criteria can only benefit from this.
Other Options Beyond Low Deposit Home Loans
If you feel that a low-deposit home loan isn’t the right fit for you, there are still other ways to get into the property market, like
Find a Home Loan Guarantor
If a close relative is willing to act as guarantor, you may be able to buy with a smaller deposit or even no deposit at all. Even you can avoid LMI completely under guarantor home loans. Be it your grandparent, parent or sibling, anyone under this can be your guarantor, subject to the requirement that he/she must be 18 years or above.
Buying With a Partner or Friend
You can buy with someone else as well, like your partner or friend, under the FHBAS (First Home Buyer Assistance Scheme). This will help you improve your deposit, increase borrowing power, and even access more competitive loan terms.
But there are some rules that you necessarily need to follow, like you and your partner must be first-time co-owners of a home in Australia. It should not be your second home.
Consider Rentvesting or Nestvesting
You can also consider this option, as some first-home buyers are using this to purchase an investment property while continuing to rent or live at home. This strategy can help you, too, in building equity even if you can’t yet afford a home that suits your lifestyle.
Utilise existing equity
If you already own a property, you could use the equity built in it as a deposit for your next purchase, whether it’s a first home or an investment property. By this, you can easily build a strong portfolio without worrying about your cash flow.
Tips for First Home Buyers to Strengthen a Low Deposit Loan Application
Getting approval for a low deposit home loan is simple, but only if you show lenders that you are financially responsible. Here are some practical steps that you can follow-
- Maintain a clean credit history – Even a small delay in making payments can impact your credit history. Don’t do that and keep debts manageable.
- Show consistent savings – Make small but regular contributions because this will prove that you are disciplined and reliable.
- Stabilise employment and income – Lenders want a steady job and consistent income over the long term. So, show them that you are financially stable enough to repay the loan.
- Reduce other debts – Pay off all your personal loans or credit cards before you apply. By this, you can improve your borrowing capacity.
- Use government schemes and grants – Combine options like the First Home Guarantee and state grants to improve your application.
- Improve your credit score– Aim for a credit score of at least 600 to improve chances of approval.
- Shop and Compare Lenders– Interest rates, fees, and flexibility differ. Find the best fit for your financial situation by comparing lenders on these aspects.
Is a Low Deposit Home Loan Right For You?
Thus, a low deposit home loan can be an effective way to enter the property market earlier, especially when house prices are rising faster than you can save. And with the support of government schemes and specialist lenders, it’s possible to buy with as little as a 2–5% deposit and avoid years of waiting.
But it’s not the right move for everyone. The risks of higher repayments, limited flexibility, and potential LMI costs still need to be considered while planning your financial plans.
Apart from home loans with a low deposit, you can also consider other alternatives. Alternatives like guarantor loans, rentvesting, or even teaming up with a partner can provide you with safer and more affordable pathways.
For more information, contact us at 1300 GET LOAN, 0456 456 267 or book an appointment at Nfinity Financials.
FAQs
The following are some more questions answered related to low deposit home loans:
Q1. How does a low deposit affect my borrowing capacity in 2025 compared to last year?
Tighter rules and higher living cost assessments mean the 2025 borrowing capacity is slightly lower than 2024, especially if you are an applicant with minimal deposits.
Q2. Can I combine multiple grants (FHOG + First Home Guarantee) with a low deposit loan?
Yes, you can use FHOG with the First Home Guarantee, but it must be subject to both schemes’ eligibility, helping you improve your deposit and borrowing power.
Q3. What happens if property prices drop after I buy with a 5% deposit?
If you do so, you risk negative equity, meaning your loan may exceed the property value. As a result, this will make refinancing and selling difficult until values recover.
Q4. How much higher are interest rates for low deposit loans vs. standard loans?
Low deposit loans can be 0.2–0.7% higher than standard rates. But this will depend on LVR, lender, and risk adjustments.
Q5. Are there lenders who waive LMI for professionals or certain income brackets?
Yes, some banks waive LMI for doctors, lawyers, accountants, or high-income professionals, even with a 10% deposit, like ANZ, Westpac, NAB, and Commonwealth Bank.
