The short version
- You can buy with less than 20%, but usually pay lenders mortgage insurance.
- Government schemes and a guarantor can help you avoid it.
- A smaller deposit means a bigger loan and more interest.
Buying with less than 20%
Many lenders prefer a 20% deposit, but plenty lend up to 90% of the property's value, and some up to 95%. With a smaller deposit you'll usually pay a higher rate and LMI, and lenders look harder at your savings history, spending and credit history. A clean credit report won't guarantee approval, but it helps, so check yours before you apply.
Why lenders like 20%
When you apply, the lender has the property valued and works out how much it will lend against it. Most prefer a loan to value ratio (LVR) of 80% or less, which means a 20% deposit.
For example, on a $1,000,000 home valued at $1,000,000, the lender would lend up to $800,000 and you'd need $200,000. If the valuer said it was worth $900,000, the lender would lend up to $720,000, and you'd need $280,000. That 20% margin protects the lender if prices dip and it has to sell the home, and a bigger deposit makes your repayments smaller too.
Ways to build your deposit
- Save through super. The First Home Super Saver Scheme lets you make voluntary contributions to your super, taxed at a lower rate, and later release up to $50,000 of them, plus earnings, for your deposit. Talk to an accountant first.
- First Home Owner Grant. Most states and territories pay a grant to first home buyers, mainly for new homes. Stamp duty discounts and exemptions for first home buyers can also leave more of your savings for the deposit.
- A gifted deposit. A parent or other relative may give you money towards the deposit. Lenders have rules about this, such as a letter confirming it's a gift, and many still want some savings of your own.
Ways to buy without 20%
A guarantor
A family member, usually a parent, guarantees part of your loan using equity in their own Australian property. Say you want to buy for $750,000 and have $100,000 saved, $50,000 short of a 20% deposit. Your parent could guarantee $50,000, with the lender taking a mortgage over their home for that amount. With enough of the loan guaranteed, you won't pay LMI.
Once you've built up 20% equity, through repayments or rising prices, you can ask for the guarantee to be released. Until then, your guarantor's home is at risk if you can't repay, so most lenders insist they get legal advice first.
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.
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.
Pros
- Buy sooner, instead of saving while prices move.
- Stop paying rent sooner.
- Government schemes can remove the insurance cost for eligible buyers.
Cons
- Lenders mortgage insurance can cost thousands, often added to the loan.
- A bigger loan means more interest and higher repayments.
- Little equity, so a fall in prices can leave you owing more than the home is worth.
Alternatives
- Saving to 20%, which avoids the insurance and widens your choice of lender.
- Buying with a guarantor, usually a parent, using their property as extra security.
- Government help, such as the 5% Deposit Scheme and First Home Super Saver.
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.