Buying With a 10% Deposit: What Not to Do

A 10% deposit is enough to buy a home, but only if you plan for the costs that come with borrowing 90%.

That is the situation for plenty of Newcastle buyers, and it is a workable one. This article covers the mistakes we see when people apply for a home loan with a 10% deposit, and what to do instead.

Do You Have to Pay LMI With a 10% Deposit?

You will usually have to pay Lenders Mortgage Insurance (LMI) with a 10% deposit. Most lenders require LMI when your deposit is under 20% of the property value, meaning an LVR above 80%.

LMI protects the lender, not you. It is a one-off cost that does not protect you or a guarantor if you cannot repay the loan. Having 10% instead of 5% will generally help you pay less in LMI. The exact premium depends on your lender, your loan amount and the property, so ask for a quote before you fall in love with a place.

Many buyers pay LMI by adding it to the loan. That keeps cash in your pocket on settlement day, but you pay interest on it for as long as it sits in the loan.

Mistake One: Only Looking at the Interest Rate

A low advertised rate does not tell you the full cost of a loan. With a 10% deposit, your LVR is 90%, and lenders price and treat that differently from an 80% loan.

When you compare rates, look at the LMI cost, the ongoing fees, whether the rate is discounted at your LVR, and whether the loan has an offset account. Some lenders occasionally run low or no LMI offers for borrowers with less than a 20% deposit. Those offers change, so a broker checking across lenders can save you a lot of reading. Our home loans page explains the types of loan we can access.

Mistake Two: Choosing Interest Only to Lower Repayments

Interest-only repayments look lighter, but they do not reduce your loan, and they rise when the interest-only period ends. Principal and interest repayments are heavier from day one but build your equity.

As an example, consider a Newcastle couple with a 10% deposit who want the lowest repayment they can get. We will use an illustrative rate of 6.75% p.a., which is not an offer, and apply the same rate to all three options below. For every $100,000 of purchase price, they would borrow $90,000.

• Interest only: about $506 a month.
• Principal and interest over 30 years: about $584 a month.
• Interest only for five years, then principal and interest over the remaining 25 years: about $622 a month from year six.

In practice, interest-only loans often carry a higher rate than principal and interest loans, so the interest-only repayment and the gap to the principal and interest repayment would differ from these figures.

The couple chose principal and interest. The extra $78 a month for every $100,000 of price in this example bought them a falling loan balance, and avoided a jump in repayments in year six. They then used a repayment calculator to test the numbers against their budget. Their trade-off was a tighter monthly budget in the early years. These figures exclude LMI, fees and any change in rate, so you can run your own numbers with our loan repayment calculator.

Should You Use an Offset Account With a 90% Loan?

An offset account can be worth it if you will keep real savings in it, because the balance reduces the interest charged on your loan. If you rarely hold spare cash, a loan with a lower rate and no offset may suit you more.

The trade-off is cost. Loans with a linked offset often carry a higher rate or an annual package fee, so the saving only appears if your balance is large enough to outweigh it. Check the fee against the cash you will realistically hold.

Fixed, Variable or Split: Picking a Rate Type

A variable rate moves with the lender's decisions, a fixed rate stays the same for a set period, and a split loan gives you some of each. Your choice depends on how much repayment certainty you need.

Fixed rates give certainty for the fixed term, but they usually limit extra repayments and can mean break costs if you leave early. Variable rates are usually more flexible, but your repayments can rise. A split loan spreads that risk, though you manage two balances. With only a 10% deposit, a small buffer matters, so many buyers want some certainty. We will talk you through the options for your situation.

Skipping Pre-Approval Before You Search

Get home loan pre-approval before you inspect homes, so you know your price range and can move when the right place appears. It is not a final offer, and it can lapse or change if your circumstances or the lender's policy change.

Pre-approval also shows how much you can borrow. Our borrowing capacity page explains what lenders look at, and the purchasing power calculator gives you a starting figure. Remember, with a 10% deposit your upfront costs also include more than the deposit itself.

Forgetting Stamp Duty and Other Upfront Costs

Your deposit is not the only cash you need at settlement, because transfer duty (stamp duty) and other costs apply. In NSW, first home buyers may be eligible for a full exemption or reduced rate of transfer duty under the First Home Buyers Assistance Scheme.

Eligibility depends on the property type, value and your circumstances. At least one buyer must be an Australian citizen or permanent resident, and neither you nor your partner can have received an exemption or concession before. Use our stamp duty calculator for an estimate, and read our first home buyers guide if this is your first purchase. Your solicitor or conveyancer can confirm what applies to your contract.

Ask a Broker Who Knows Newcastle

A local broker can compare lenders for your deposit size and explain the trade-offs in plain language. Whether you are eyeing Hamilton, Charlestown or Warners Bay, our team can talk you through your options. You can also find your nearest team through pages like our Hamilton mortgage broker page.

Call one of our team at New Level Lending or book an appointment at a time that works for you. We will look at your deposit, your budget and the lenders across Australia we can access, then help you choose a loan you can live with.

Frequently Asked Questions