Compare 10% deposit home loans

Before plunging into the numbers and how much of a deposit you need to buy a piece of real estate, let’s start with the LVR part.

LVR translates to ‘loan-to-value ratio’, which means how much money you can borrow versus the value of the property being purchased. For example, if a property was worth $400,000, you had a 20% deposit of $80,000 and you were borrowing $320,000 from a lender, then your loan-to-value ratio would be 80 per cent. This is because you were borrowing 80 per cent of that property's value. 

This is a very important equation and will determine how much money you can borrow to buy a property, and whether or not you can purchase the property you want.

When you’re researching home loan products, most mortgages will list the LVR. This does vary from lender to lender, and loan to loan. The percentage of LVR will determine how much you need for a deposit.

In the case of a 90 per cent LVR home loan, the loan amount (what you borrow) is calculated as 90 per cent of the property’s value.

If you’re allowed to borrow up to 90 per cent of the sale price, you would need a deposit of at least 10 per cent of the property’s value to secure this type of loan.

An easy way of calculating LVR is to divide the purchase price of the property by 100 and then multiply that amount by the LVR.

Let’s say the property costs $1,000,000. If you divide by 100, the LVR would be $10,000; if you then multiplied by 90, you’d get $900,000.

Based on this calculation, you could deduce that you would need the difference between these two amounts ($100,000) as a deposit to qualify for the home loan. Of course, this figure doesn’t factor in associated purchase costs such as stamp duty and conveyancing.

This is only a guide, and not a hard and fast rule. Some lenders calculate the LVR based on a property’s valuation, not the purchase price.

The purchase (or listed) price of a property may differ from the property’s actual value. Where there’s a difference between these two figures, a lender or mortgage insurer may use the lower value.

It’s worth noting that not all lenders require a valuation of the property.

You’ve found a property to buy, and have a 10 per cent deposit plus additional funds for upfront purchase costs such as legal fees, stamp duty and pest and building inspections – but what else may determine if you're eligible for a 90% LVR home loan? 

Each lender will have its own lending criteria for a home loan, but there are ways to do your due diligence and ensure your application is as supported as possible.

• Borrowing power calculator. A lender will calculate your ability to service a loan based on the property price, your income, expenses and dependents. But a borrowing power calculator may also give you a good idea of this before you apply. If your results are lower than you'd like, you may want to consider adjusting your budget, eliminating some expenses or squirrelling away more savings. 
• Genuine savings. Genuine savings are (generally) determined by the amount of cash you have in your bank account, and how long you’ve been saving. For example, you might have saved the 10 per cent deposit over a period of years, which would be considered genuine savings. Or it might have been deposited recently by a family member, which might not be considered genuine savings. It will come down to the lender’s discretion as to what it considers to be genuine savings.
• Credit score. Your lender may not grant you a home loan just because you have the deposit; a bad credit rating could impact whether or not your application is successful. If you don’t know your credit score, there are companies that can provide a copy of your credit history either for free (which takes longer), or for a relatively small fee (which is quicker).

The obvious benefit of a 90 per cent LVR home loan is the amount you can potentially borrow. It’s easier to save a 10 per cent deposit than a 20 per cent deposit.

Another benefit is that it might allow you to qualify for a mortgage – something that might not be possible if you had to take out a home loan with an LVR of 80 per cent.

And if you’re already a homeowner, being able to secure a 90 per cent LVR home loan could mean you get to purchase another (investment) property and start to grow a real estate portfolio.

Lenders and financial experts typically recommend saving a deposit of 20 per cent, or having an 80% LVR. 

While a smaller deposit will make the saving and waiting process a little easier for would-be borrowers, it does come with its own risks, including:

• Lenders mortgage insurance. One cost you will run into by having a deposit under 20 per cent/an LVR under 80 is lenders mortgage insurance (LMI). LMI indemnifies the lender against any financial losses in the event you default on your home loan repayments. It’s a one-off payment that is either paid by you as part of your deposit (thus increasing the amount you need for a deposit) or is added to the amount you borrow. LMI can be tens of thousands of dollars, depending on the property price, so check out an LMI calculator before you apply. 
• Borrowing more. Having a larger deposit does mean you're borrowing less and therefore taking on less debt from a lender. A mortgage is generally one of the biggest ongoing bills you'll have in your lifetime, and the smaller the amount borrowed, the less interest you'll also have to pay.
• Higher interest rates. Generally speaking, lenders look favourably on borrowers with larger deposits as this helps to make them appear less 'risky' on their home loan application. Due to this reduced risk on the lender, a borrower with a larger deposit will typically be offered a more competitive interest rate. 
• Less special offers. Not only may a lender offer someone with a lower LVR a more competitive interest rate, they may be offered greater features and extras on their mortgage. Having a 90% LVR or higher may mean you're unable to access handy features like an offset account or the ability to make additional repayments. You may also miss out on benefits like cash back offers or bundled home loan packages with credit cards.

Whether you're looking for an investment property or a home to live in as a first home buyer, home loan lenders will generally have a loan option that suits your property type. 

Most 90 per cent LVR home loans are available for owner-occupiers, investment purchases, debt consolidation and refinancing. You may also be able to find 90% LVR variable rate loans or fixed rate loans. 

When doing your research, the loan should outline what it can be used for.

Now that you know how to calculate a 90 per cent LVR home loan, and what you can buy, it’s worth knowing whether you qualify.

If you're still unsure of whether you may qualify for a 90% LVR home loan, it may be worth consulting with a mortgage broker. 

Mortgage brokers may be able to help save you time and effort in choosing a home loan. They are considered experts in their field and have a greater experience in translating everyday Australians' unique financial situation into eligible home loan applications. 

If your credit score isn't perfect, or if your deposit is under 20 per cent, the number of loans you may qualify for could be lessened. A mortgage broker can use their specialist knowledge to potentially guide you towards home loan offers that you may be eligible for.