Do I really need a 20% deposit?

Do you really need a 20% deposit? The short answer is no, but a small deposit can come with some extra costs.

If you want to buy a property, you will need to consider how much you can save for a deposit. Many lenders consider a deposit of 20% of the property's purchase price to be ideal and loans with a smaller deposit may be considered high-risk.

For more information on low deposit home loans ready our guide to home loan deposits.

Why should I save for a 20% deposit?

If you can afford it, there are benefits to paying a 20% deposit. If your LVR is less than 80% your loan will not be considered high-risk by a lender and your application may be approved faster and with less difficulty. Your lender is unlikely to require you to pay LMI and you may be in a better position to negotiate a more favourable interest rate and have access to more types of home loans.

Paying a 20% deposit means that your loan will be smaller and you'll have more equity. Your monthly repayments will be lower and you are likely to pay off your loan and have complete ownership of your home sooner.

What if I can't afford a 20% deposit?

In today's economic climate a 20% deposit can seem unattainable for many prospective property owners, however it's still possible to obtain a home loan with a deposit of as little as 5%.

If your Loan to Valuation Ratio (LVR) is more than 80% your lender may require you to pay Lenders Mortgage Insurance (LMI). LMI will be calculated as a percentage of the loan amount and is required by lenders when a loan is considered to be high-risk. It is important to remember that LMI protects your lender, and not you if you were to default on your repayments.

LMI can be paid upfront or it can be included in your loan amount. This means that you will have to borrow more to cover the cost of the LMI in your loan, and your monthly repayments will usually be higher.

As with any other loan, lenders will consider your personal circumstances and financial history when assessing a loan application. Lenders consider your savings history, if you have genuinely saved for your deposit, whether you have a good credit history and whether you have a stable job with a steady income.

If your deposit is less than 20% of the property's purchase price, you might also be charged a higher interest rate.

Low on a deposit? We could have the home loan for you.

How can I avoid paying LMI?

There are a number of things you can do to get a home loan with a small deposit and avoid paying LMI.

#1. Try to grow your deposit as much as you can

Sometimes it takes a few extra payslips before you reach that 20% benchmark. It can make more sense to wait and save instead of buying and paying LMI. This decision can depend on how much you can afford to pay in LMI. Calculate how much LMI you might pay using our handy LMI calculator.

#2. Consider getting a guarantor

A guarantor is typically a close family member who offers to use some of the equity in their own home as security for your home loan. They will need to have enough equity to cover 20% of the new property's value. Keep in mind, that you must show that you can meet your repayment obligations on your own without your guarantor's help. If you default, your guarantor may be required to repay the funds. Guarantor loans come with strict eligibility criteria and requirments.

#3. Some low risk professions can avoid paying LMI

Some lenders are willing to waive LMI fees for applicants working in occupations they view as low risk such as doctors and engineers. Our Home Loan Specialists can help you find out if your job can help you avoid paying LMI.

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What other costs will I need to pay upfront?

In addition to your deposit, there are other costs that need to be paid upfront that you should be aware of. These include stamp duty , inspection costs, loan applicaion or closing costs, and conveyancing fees.

Stamp duty is a government tax payable on the sale of property. How much you will pay in stamp duty depends largely on what state or territory you are buying in, the cost of the property and the type of property. Stamp duty can be expensive and you should bear in mind this additional cost when saving for your deposit. Calculate how much stamp duty you might need to pay using our stamp duty calculator.

If you are a first-time home buyer you may also be eligible for a First Home Owner Grant. This is a government grant available in each state and territory that can potentially cut many of these additional costs if you meet the criteria. For example, in New South Wales stamp duty for first-time buyers has been abolished for properties worth less than $650,000, and some concessions apply for homes worth less than $800,000.

Wondering how much that property is worth? Find out with our free property report.

If you are considering taking out a loan but do not have a 20% deposit saved or if you are wanting advice on saving for a deposit, speak to a Lendi Home Loan Specialist who can help you understand your options.