What is a low deposit premium (LDP)?

Getting your foot in the door when it comes to property is tricky. For many first-home owners, getting enough cash together to fund the deposit is often one of the toughest parts of the home-buying process. And while you can often get away with a deposit that’s less than 20% of the purchase price, banks and lenders will often charge a fee to help them offset the risk of lending money to you.

Breaking down a low deposit premium

A Low Deposit Premium, or LDP for short, is a one-off, non-refundable, non-transferrable bank fee that some lenders add to home loans with low deposits. Low deposit loans are generally higher risk for banks and lenders, so an LDP is designed to protect your bank against any loss they may incur if you’re no longer able to service your loan.

An LDP isn’t a set fee. Instead, it’s calculated based on the size of your deposit compared to how much you borrow. Ultimately, the more you contribute towards the purchase price of your property in the form of a deposit, the lower the LDP fee will be.

Alternatively, some banks and lenders will charge lender’s mortgage insurance to borrowers with small deposits. With that said the circumstances of your home loan will determine whether you’re charged an LDP or lender's mortgage insurance, but you’ll only need to pay for one of these options.

What is lender’s mortgage insurance (LMI)?

Similarly to an LDP, lenders mortgage insurance is a one-off, non-refundable, non-transferrable insurance premium that's added to your home loan. The amount that you pay in LMI depends on the size of your deposit and how much you borrow.

LMI is just another way that banks and lenders can protect themselves in the event you’re unable to repay your home loan. Your lender will collect the LMI payment from you and pass it on to their insurance provider.

Once again, there’s no set fee for LMI. Instead, each lender has their own formula for working out how much LMI you’ll have to pay. It’s usually calculated based on the size of your deposit and how much you borrow. As a general rule, the bigger your deposit compared to your home loan, the lower the LMI will be.

Benefits of an LDP and LMI

Buying a home is already one of, if not, the biggest investment you’ll make in your life. So, for many buyers, it’s worth doing everything in their power to reduce any costs associated with buying a property. With that said, both an LDP and LMI offer several important benefits for buyers.

Firstly, these low deposit fees can allow you to enter the property market sooner by providing access to home loans with lower deposits. By getting into the market sooner, you’re often able to save money on paying rent and redirect it towards your mortgage repayments instead.

Plus, by having LMI or LDP, you don’t have to rely on a guarantor to provide extra security to support your home loan.  

Lastly, once you’ve purchased a property, you can start to grow your home equity.

Other borrowing options for low deposit loans

LMI and LDP aren’t the only options for getting into the property market with a low deposit. Here are some of the other options that you might want to take advantage of.

Guarantor support

A guarantor is someone who offers up their own property as security for your home loan. If you’re not able to secure the full loan amount yourself, having the support of a guarantor may help to make banks and lenders consider you more favourably. Plus, you might also be able to avoid paying fees like LDP and LMI when you’ve got a guarantor on your side.

When someone goes guarantor for your loan, they essentially agree to foot the bill if you’re unable to meet your repayments. As you can imagine, that doesn’t come without serious financial risk for the guarantor, so it’s often worth seeking independent financial advice before agreeing to a commitment like this.

Property share

Co-ownership or property share arrangements allow you to share the cost of purchasing and owning a property with family or friends, while still retaining individual control of your finances.

Each property share borrower is listed as an owner of the property. While property share arrangements can offer convenience, flexibility and the ability to pool resources to buy a property, these setups tend to come with serious financial risk. A co-ownership contract can help to outline the terms and conditions of the arrangement, including ownership shares, financial responsibilities, dispute resolution and exit strategies.

Before entering into this type of arrangement, it can be worth chatting with a qualified financial advisor to get a better understanding of your risks, obligations and the potential impact on your financial situation.

Home Guarantee Scheme

The Home Guarantee scheme (HGS) allows homebuyers to purchase a property without the need for LMI. The Guarantee is not a direct cash payment or a deposit for the home loan.

Please note that Unloan does not participate in the Home Guarantee Scheme, Victorian Homebuyer Fund or other government home-buyer assistance schemes. If you are eligible for the First Home Buyer Grant, these funds cannot contribute to your 20% deposit. Please speak to your conveyancer on how best to approach this.

Whether you’re thinking of starting your home-buying journey or you’re ready to refinance, Unloan has a stack of different resources to help you navigate the world of homeownership.

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍