The short version
- A 5% deposit is possible, usually with lenders mortgage insurance, a guarantor or a government scheme.
- You'll also need money for stamp duty and buying costs, unless you're exempt.
- Expect stricter checks on your savings and spending.
Can I buy with a 5% deposit?
Yes. Most lenders prefer a 20% deposit, but many accept less if you meet their conditions, and some lend up to 95% of the property's value. Governments and lenders both know a full 20% deposit is hard to save, so there are schemes, guarantees and concessions to help.
The government's 5% Deposit Scheme lets eligible first home buyers buy with 5% without paying LMI. Outside the scheme, expect to pay LMI, which can be a large cost at 95%. Lenders also want to see genuine savings, usually money you've saved over at least three months.
Lenders mortgage insurance
With less than a 20% deposit, most lenders charge lenders mortgage insurance (LMI). It protects the lender, not you, if you can't repay, and can cost thousands of dollars, either upfront or added to the loan. The cost depends on the property's value, the loan amount, the size of your deposit, and the lender's insurer.
LMI doesn't get you off the hook: if the home is sold for less than you owe, the insurer can still pursue you for the shortfall. You may avoid it with a guarantor, through a government scheme, or with a lender's waiver for some professions, such as doctors, lawyers and accountants. A mortgage broker can tell you which lenders take small deposits and how their LMI costs compare.
Buying with a guarantor
A parent or other family member can guarantee part of your loan, usually with the equity in their own home. Many lenders will then lend more than 80% of the price, sometimes all of it, without LMI.
The guarantor is responsible for the guaranteed amount if you can't repay, so it's a serious commitment. Most lenders insist they get independent legal advice first, and the guarantee can usually be released once you've paid the loan down or the property has grown in value.
Government help for first home buyers
Check what you're eligible for before you apply. Each scheme has its own rules and price limits.
- The 5% Deposit Scheme, run by Housing Australia, lets eligible first home buyers buy with a 5% deposit without paying LMI.
- The Family Home Guarantee lets eligible single parents and legal guardians buy with a 2% deposit.
- The First Home Owner Grant is a one-off payment from your state or territory, mostly for newly built homes.
- Stamp duty discounts or exemptions for first home buyers, set by each state and territory.
- The First Home Super Saver Scheme lets you save part of your deposit through voluntary super contributions.
Help for particular groups
Some buyers have extra options. Australian Defence Force members and veterans can get help through the Defence Home Ownership Assistance Scheme, and some lenders offer LMI waivers or smaller deposits to professionals such as doctors, lawyers and accountants. Single parents may qualify for the Family Home Guarantee with a 2% deposit.
Pros
- Buy years sooner than saving 20%.
- Government schemes can cover the insurance for eligible buyers.
- Rent goes towards your own home sooner.
Cons
- A 95% loan has the largest repayments and the most interest.
- Lenders mortgage insurance can be costly without a scheme.
- Little room if prices fall.
Alternatives
- Saving to 10% or 20%, which cuts or removes the insurance.
- A guarantor home loan.
- A mortgage broker, who can match you with lenders that suit your situation.
Before you apply
Lenders look at your income, your debts and credit limits, your spending and your credit history. Paying down cards and cutting card limits can raise how much you can borrow.
Pre-approval tells you what a lender may lend, so you can house hunt with a budget. Each application can show on your credit report, so compare first and apply to one lender at a time.