95 LVR (5% Deposit) Home Loans

Whether you’re borrowing to buy your first home or to add to an investment property empire, your loan to value ratio (LVR) matters. High LVR loans – where you’re borrowing more than 80% of a property’s value – represent a bigger risk to lenders, which can mean higher rates and Lenders Mortgage Insurance (LMI) premiums.

But what if you don’t want (or can’t afford) to wait until you’ve put together a bigger deposit? Here’s what you need to know about high LVR home loans and how to choose between mortgages that allow borrowers with LVRs of up to 95%.

See also: How big a deposit do you need?

What is a 95% LVR home loan?

A 95% loan-to-value ratio means you’re borrowing 95% of your property’s total value. For example, if the property is worth $580,000, a 95% LVR loan would mean borrowing $551,000 and putting down a deposit of just $29,000.

With high LVR loans, lenders take on more risk – if you default, they’re more likely to wear a loss.

Imagine if, one year into the loan term in the above example when there’s $540,000 outstanding on the loan, shifts in the property market mean the property’s value drops by $60,000 – it’s now worth $520,000. In such a situation, if the borrower couldn’t meet their repayments and the bank repossessed their house, it couldn’t recoup the full amount it was owed from selling the property and would make a loss. This is why borrowers taking out high LVR home loans are generally charged for LMI – an insurance that protects banks in these cases.

LMI premiums are generally charged on loans with LVRs exceeding 80%, so it’s often suggested buyers accumulate a deposit of at least 20%.

In our example, this would mean a deposit of $116,000, which might mean several more years of saving. Borrowers who take out 95% LVR loans are often anxious to get in the market as soon as possible, perhaps because they think the market is heading up, potentially pricing them out of the properties they want.

Read more: How much will your LMI premiums be?

95% LVR investment loans

Many lenders also offer investment loans with up to 95% LVR. As with owner occupier loans, high LVR investment loans typically come with significantly higher rates and can be more difficult to get approved for. LMI normally also applies to an investment loan where the LVR exceeds 80%.

How to compare 95% LVR home loans

Plenty of lenders offer loans to borrowers with 5% deposits, including Australia’s largest banks: All of the big four currently offer up to 95% LVR home loans at the time of writing.

But, just as with any loan product, it’s important to compare all your options to find the one that most suits you. Check out some of the market’s most competitive:

Rates and fees

Interest rates on 95% LVR home loans are usually among the most important considerations. Many lenders have tiered rates – the higher the LVR, the higher the rate. It’s always important to also check the comparison rate, as it’s a better representation of the true cost of the loan, including account keeping and establishment fees.

Extra features

Additional features like offset accounts and unlimited extra repayments can help bring down the overall cost of a loan. Some lenders offer fewer of these features on higher LVR loans.

Home Guarantee Scheme eligibility

Some borrowers exploring high LVR home loans might be able to benefit from the Home Guarantee Scheme. As part of the scheme, the government acts as guarantor for a portion of your mortgage. That can help eligible buyers purchase with a 2% or 5% deposit without paying for LMI.

You can only take part in the scheme if you borrow from a participating lender, so if you’re comparing products and think you might be eligible, it could be a smart move to explore lenders that are part of the scheme. These currently include CommBank, NAB, and Westpac, but you can see the full list of participating lenders here.

95% LVR loans without LMI

LMI premiums generally don’t vary much across different lenders as there are only a few insurers that provide it. However, there are some products where you might not need to pay LMI even if LVR is 95%

• Home Guarantee Scheme: With the government providing a guarantee for a portion of the mortgage, low-deposit buyers present a less risky prospect for lenders, and so LMI premiums are unnecessary. The scheme encompasses three guarantees: The First Home Guarantee, the Regional First Home Guarantee, and the Family Home Guarantee. Under the First Home Guarantee, borrowers can buy with a deposit as small as 5% (95% LVR) and not pay LMI. The Family Home Guarantee, available for eligible single parents or guardians, can see the government guaranteeing up to 18% of a home loan, potentially meaning a buyer only needs a 2% deposit.

• Exemptions: Some lenders have special offers where LMI can be waived. At Westpac for example, LMI can be waived for dentists, hospital doctors and nurses, among many other medical practitioner roles, provided borrowers earn over a certain income. Select essential workers may be able to dodge the cost at BankVic while ubank doesn’t charge LMI on loans with LVRs up to 85%.

• No LMI home loans: Non bank lender Sucasa does not charge LMI on its range of home loan products, including when LVR is 95%. Sucasa home loans are split in two: The portion representing up to 80% LVR and the remainder. Both loans are paid off simultaneously.

• With some products, the rate on the smaller loan is higher, while others offer the same rate for both but come with higher up front fees. Sucasa COO Adam Trouncer told InfoChoice Group that Sucasa aims to always have lower upfront costs and rates than any loan with LMI for a given LVR.

Benefits of a 95% LVR Home Loan

The general consensus is an ideal deposit is at least 20% of the property price, since anything less usually means paying for LMI and receiving a higher interest rate.

There are a few advantages to higher LVR home loans though:

Get in the market sooner

Putting together a deposit, particularly if you’re aiming for 20% of the property price, can often be the hardest part about getting into the market. It took on average 5.6 years for an Aussie on an typical salary to save a 20% deposit on a median priced home, as per REA data considering October 2024.

Buying with a smaller deposit can mean purchasing property much earlier than you might if you were to wait until you’d saved the full 20%. If property values go up, it could work out better to pay more interest and LMI in order to buy sooner and benefit from price increases.

Imagine you’re a first home buyer looking at a property worth $600,000, but you only have a 5% deposit ($30,000). That might mean LMI premiums of $31,008 (using the Your Mortgage LMI calculator) and a higher rate. But, let’s say you decide to wait until you have a 20% deposit, which could takes another six years. If the value of that same property has risen to $800,000 in the meantime, you’d have been better off taking the higher LVR option and buying earlier.

And, once you’ve paid down enough of the loan, you might be able to refinance to get a lower rate.

Take advantage of the First Home Guarantee

If you’re a first home buyer, participating in the FHG can negate a lot of the downsides to high LVR loans. Since the government acts as guarantor, the loan is less risky to lenders, often resulting in comparatively lower rates and no need to pay LMI.

Disadvantages of a 95% LVR home loan

Paying LMI

LMI is a significant disadvantage of 95% LVR home loans. LMI protects the lender (not the borrower) in case of default. Since it’s often a substantial amount, it may increase the overall cost of the home loan and can be a financial burden for the borrower. According to our LMI calculator, a 5% deposit on a $750,000 owner-occupied home could mean an LMI premium of $38,760 over a 30-year loan term.

Higher interest rates

Borrowers taking out higher LVR home loans typically face higher interest rates. Lenders view these loans as higher risk as a smaller deposit means less equity and more chance of ending up in the red in the case a borrower defaults. Consequently, they charge higher interest rates to mitigate this risk. Over the life of a home loan, this can amount to a significantly higher cost for the borrower.

Risk of negative equity

Negative equity occurs when the value of a property falls below the outstanding balance on the mortgage. With a 95% LVR, there’s a higher risk of this happening, especially if property prices decline. This situation can become a big problem if the borrower tries to sell or refinance.

Fewer loan options

Not all lenders offer 95% LVR home loans due to the higher risk involved, and those that do may have stricter eligibility criteria. This limits the borrower’s options and may force them to settle for a loan with less favourable terms or higher costs.

Bigger loan repayments

A smaller deposit means borrowing more money, which leads to larger loan repayments. This can strain a borrower’s budget, especially if interest rates rise or their financial situation changes. Larger repayments also mean that a higher portion of a borrower’s income is dedicated to servicing the mortgage, potentially reducing their ability to save or invest in other areas.

How to get approved for a 5% deposit home loan

In order to increase your chances of approved for a 95% LVR loan, you should make sure to:

1. Get hold of a copy of your credit fileThis will give a good sense of how big of a risk you are going to appear to lenders. Services like Credit Score Hub in the CommBank app allow you to check your credit score for free.

2. Keep all of your payments up to date on your liabilitiesThis includes all of your monthly bills such as your mobile phone, car payments, credit cards, and electricity bills. Missed bills hurt your credit score.

3. Look at minimising your credit card limits and reduce your personal debts where possible

4. Try to curb your spending and cut unnecessary expenses This can be effective in the six months leading up to your application.

5. Have a minimum of 5% of the purchase price of the property in genuine savings (i.e money you’ve earned yourself)This will help you prove your ‘credit-worthiness’ with your lender.

Why you might be declined for a 95% LVR home loan

If you’re planning to apply for a 95% loan, it’s important to put forward a strong application. Even if you do so, however, there’re plenty of reasons a lender may decline a loan including:

• You’ve had numerous credit checks performed on your credit file

• You have high credit card debts and other personal loans

• You’ve had a default registered against your name

• Your time in your present employment or industry is minimal

• You’ve recently changed jobs and you’re still on probation

Guarantor Home Loans

Another way to circumvent LMI on a 95% LVR loan is to get someone to act as a guarantor on your loan. This offers an extra layer of security for lenders and often means they’ll be happy to waive LMI.

Photo by Egor Myznik on Unsplash