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Can I buy a home with a deposit of less than 20%?

By ,| 5 min read

While property price growth is slowing in some parts of Australia, there’s no denying it’s become more difficult to save for a home loan deposit in recent years.

Recent research by CoreLogic and ANZ shows that the time it takes to save a 20% deposit in Australia has increased from 9.2 years in March 2020 to 11.4 years currently.

With this in mind, many prospective home buyers are likely wondering how they can buy their dream home sooner, without saving a 20% deposit.

In this article, we explain why lenders typically prefer a 20% deposit from borrowers and what the consequences are of getting a loan with a low deposit. We also outline 9 ways you can get a loan with a deposit of less than 20%.

Why do lenders prefer a deposit of 20% or more?

When borrowers apply for a home loan, they are assessed on a few factors. These include their income, credit score, assets, debts and deposit, which all help to determine an applicant’s borrowing power.

There are a few reasons a 20% deposit is preferable to lenders.

  • It’s proof that you have a track record of saving
  • Your loan size will be smaller, meaning you won’t owe the lender as much as you would with a smaller deposit
  • There’s less risk for the lender
  • You’re perceived to be a low risk borrower.

There are also a few benefits to borrowers having a 20% or more deposit.

  • You’ll borrow less money, meaning you’ll pay less interest over your loan term
  • You could be offered a lower interest rate than low deposit borrowers
  • You’ll start off with more equity in your property.

With that being said, it’s still possible to get a loan with a deposit of less than 20% and there can be benefits for borrowers, depending on their personal and financial situation.

What are the consequences of getting a loan with a deposit of less than 20%?

It’s certainly possible to get a home loan with a deposit of less than 20%, but there can be some consequences depending on the type of home loan you go with (more on this below).

First, it’s possible you’ll have to pay Lenders Mortgage Insurance (LMI). LMI is a one-off payment that covers the lender in the event you cannot repay your home loan.

LMI is determined on a sliding scale, meaning the lower the deposit you have, the more you’ll have to pay in LMI fees.

It can be paid upfront or capitalised onto your home loan, meaning it’s paid off gradually with your monthly repayments.

You also may be charged a higher interest rate and have a longer loan term than a borrower with a higher deposit.

However, there are ways to get around the higher costs that can come with a low deposit home loan, and the benefits can outweigh the costs for some borrowers.

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Ways to get a home loan with a deposit of less than 20%

Here are 9 ways you can get a home loan if you haven’t saved up a 20% deposit.

1. First Home Guarantee

The First Home Guarantee (previously known as the First Home Loan Deposit Scheme) is a federal government scheme that helps first home buyers purchase a home without having to save up a 20% deposit.

Under the Guarantee, eligible first home buyers can buy a property with a deposit of as little as 5%. The government guarantees up to the remaining 15%, meaning the borrower does not have to pay LMI.

Find out more about eligibility criteria and property price caps under the scheme.

2. Regional Home Guarantee

Announced as part of the 2022/2023 federal budget, the Regional Home Guarantee is designed to help regional home buyers get into the property market with a low deposit.

Like the First Home Guarantee, borrowers who take advantage of the Regional Home Guarantee can purchase a home in a regional area with a deposit of as little as 5%. The government guarantees up to the remaining 15% to prevent LMI charges.

Unlike the First Home Guarantee, however, borrowers who use the Regional Home Guarantee don’t have to be first home buyers – but they can’t have owned property in the last 5 years.

Learn more about the Regional Home Guarantee.

3. Family Home Guarantee

The Family Home Guarantee is a federal government scheme that allows single parents with at least 1 dependent child to buy a house with a deposit as little as 2%. The government guarantees up to the remaining 18% to help the borrower avoid LMI.

Similar to the Regional Home Guarantee, buyers who take advantage of the Family Home Guarantee don’t have to be first home buyers, but they can’t currently own property.

Read more about eligibility criteria and property price caps for the Family Home Guarantee.

4. First Home Owners Grant

The First Home Owners Grant (FHOG) is a government grant that supports first home buyers in purchasing or building a new home. The amount available from the grant varies between Australia’s states and territories.

While the FHOG likely wouldn’t be enough to cover your whole deposit, it can provide a boost to your deposit if you haven’t quite saved up 20% of the home’s purchase price.

For example, in NSW the grant is $10,000, whereas in Tasmania the grant is $20,000.

5. Pay LMI

If you aren’t eligible for a government scheme or grant to help get you onto the property ladder, it is possible to get a home loan with a deposit as little as 5% when you pay LMI.

It’s important to note that the LMI fee will increase the lower your deposit is and the higher your loan amount is.

Ensure you carefully weigh up the benefits and drawbacks of buying now and paying LMI, rather than waiting until you have a 20% deposit.

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6. Guarantor home loan

A guarantor home loan involves a guarantor, typically a parent or close relative, who uses the equity in their home to guarantee your home loan.

Say you have saved enough for a 10% deposit. Your guarantor is able to secure your home loan by using their equity – enough to cover the remaining 10% of your deposit – to get you over the 20% line, helping you avoid LMI.

The guarantor doesn’t actually have to pay the 10% – this amount of equity just acts as a guarantee.

However, if you default on your home loan repayments, your guarantor is legally obligated to pay back the rest of your loan.

7. Financial gift

If you receive a financial gift from the Bank of Mum and Dad, you might not have to save up a full 20% deposit.

For money to be considered a financial gift, there should be no obligation for you to repay the funds given to you.

A financial gift can partially or fully pay for your deposit, however it will typically be considered non-genuine savings. This means you’ll need to provide evidence of some genuine savings, which is generally money or assets that have been saved up or held for at least 3 months.

8. Professional home loan

A professional home loan isn’t a specific type of home loan, but rather a loan that comes with special discounts or fee waivers that is available to borrowers in certain professions.

These professionals usually have stable jobs and higher incomes, for example doctors, dentists and accountants. If you work in one of these professions, you may be able to get a home loan with a low deposit without having to pay LMI.

9. Specialist lender

If you have a deposit less than 20%, you may be able to get a home loan without paying LMI with particular lenders.

There are some lenders that provide home loans for borrowers with a deposit of as little as 15% and don’t charge LMI.

You might want to chat to a Home Loan Specialist or a mortgage broker to find a lender that suits your needs and situation.

Are you looking for the right home loan, but you don’t have a 20% deposit? Our Home Loan Specialists are here to help. Book an appointment at a time that suits you.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: home loan, saving, interest rate, lmi (lenders mortgage insurance), first home, first home buyer, first home owners grant, deposit, low deposit

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