Talking with friends, family, or colleagues you often hear the magical 20 per cent mentioned. Given the rapid rise in property values across Australia the size of a deposit for a home loan is rising exponentially, and for some buyers, 20 per cent is an unrealistic sum to save. This is especially true when you factor in other costs of buying a house like stamp duty and legal fees.
But how accurate is this figure, and is it set in stone? The good news is that not all lenders require this amount, and you can secure a home loan with a smaller deposit. In fact, in some cases, you won’t need a deposit at all.
Read on as we shed some light on the common misconception you invariably need a 20% deposit, including the various alternatives to paying it. This will help calculate how much you need to save for a deposit, so you can buy your dream home asap.
Let’s start by understanding what a deposit is.
A deposit is an initial sum you pay to the lender to secure a home loan, excluding all other transaction costs related to your property purchase. It gives them some form of security and also shows them you are disciplined financially and able to save.
The size of your deposit is important as it determines what loan you qualify for, as well as what property you can afford. Having a larger deposit means you have to borrow less money for the home loan, and you are also likely to pay less interest over the life of the loan. It could also help you pay off your loan faster.
If you have a smaller deposit, your lender may offer you a loan with a higher interest rate, which translates into higher repayments and a potentially longer loan term.
So what are the alternatives to paying a 20 per cent deposit?
The short answer is no, lenders may accept deposits from 5 per cent to 20 per cent or more of a property’s value.
Lenders have different criteria, with some only willing to accept a 20 per cent deposit, while others are more flexible. Just be aware that smaller deposits generally mean a higher interest rate and more expensive monthly repayments.
Lenders use a range of criteria when assessing your loan application, including your buyer profile, income, the value of the property, and the Loan-to-Value Ratio (LVR). LVR is a calculation where the size of the home loan is divided by the value of the property, with a lower figure indicating lower risk.
Lenders will also appraise buyers based on their life stage, and where they are on their property journey. First-time buyers are likely to have less other equity or investments than an older applicant who owns their property outright, so may have to pay a higher interest rate.
Lenders have different criteria, with some only willing to accept a 20 per cent deposit, while others are more flexible.
The bottom line is that lenders do prefer larger deposits of 20 per cent (or more) because it reduces their risk.
If you are likely to have a smaller deposit, here are some ways you can qualify for a home loan.
If you don’t have a 20 per cent deposit, you can still qualify for a home loan by paying Lenders Mortgage Insurance (LMI). This fee protects them in case you default or stop paying back your loan. This amount is typically rolled into your monthly repayments by your lender rather than being payable as a lump sum. This type of loan is also called a low deposit mortgage with LMI.
A benefit of this option is that it gets you onto the housing ladder. But it does mean your monthly repayments will be more expensive.
For example, if you’re buying a $500,000 property in NSW, with a deposit of $10,000, you would have to pay a total of $15,200 in LMI.
The First Home Loan Deposit Scheme (FHLDS) is a federal government initiative designed to help eligible first home buyers who have saved a 5 per cent deposit. The FHLDS means the government is effectively guaranteeing the remaining 15 per cent of your deposit, allowing you to avoid needing to pay LMI. It also means you can get onto the property ladder sooner, rather than waiting to save a full 20 per cent deposit.
The FHLDS means the government is effectively guaranteeing the remaining 15 per cent of your deposit, allowing you to avoid needing to pay LMI.
If you have a small deposit, you can also apply for a guarantor home loan. This is when someone else, such as your parents, guarantees a portion of your loan. They do this by putting up security, like a property they own, against the home loan. While they are acting as a guarantor, they are liable for repaying the portion of the loan they have guaranteed if you fail to. Some lenders will also allow first home buyers with a guarantor to borrow up to 105 per cent without paying LMI.
Besides having equity in a property or assets, your guarantor also needs to have a stable income and good credit history, to show they can meet the loan repayments if required.
If you’re from a specific profession and a high-income earner some lenders may not charge you LMI, even if you don’t have the required deposit. This is called a no LMI or waived LMI loan. If you’re a medical doctor, accountant, lawyer, mining specialists, professional athlete, or in the entertainment industry you could qualify.
Lenders have different criteria, but specific qualifications and a certain level of income are some of the primary factors they will assess. If this option applies to you it does mean you can enter the property market, but your loan could be more expensive in terms of the interest rate offered to you and monthly loan repayments.
If you’re a medical doctor, accountant, lawyer, mining specialists, professional athlete, or in the entertainment industry you could qualify for a loan without LMI.
If you’re an eligible single parent, you could purchase a property via the federal government’s Family Home Guarantee scheme. Like the FHLDS, the Family Home Guarantee effectively guarantees 18 per cent of a deposit, meaning you could qualify with a 2 per cent deposit, and avoid paying LMI.
However, you need to be a single parent with at least one dependent child and there are also criteria you must meet around your income and the value of the property. If you’re a single parent on a single income, this option does give you the possibility of owning property, though you do need to make sure you qualify.
Rent-to-buy (RTB) or rent-to-own (RTO) schemes give you the option to buy a property, typically within three to five years without a deposit. Over this timeframe, you pay rent, and ‘option-to-buy’ fees to the seller, and apply for a home loan when the rental period is over.
This is a fairly risky option as there is no guarantee you will qualify for a home loan, and there are currently no established legal protections for buyers in RTB schemes.
Keep in mind that there are currently no established legal protections for buyers in rent-to-buy-schemes.
Let's now look at how much deposit you need for a range of properties at different price points.
This table shows how the value of a property plays a big part in the size of the deposit you need to save for.
Ultimately, how much you can save for a deposit will depend on your personal circumstances. You also need to weigh up the pros and cons of opting for a smaller deposit. As we have seen here, there are downsides to many of these scenarios, including more expensive interest rates and monthly repayments. On the other hand, if you can afford it you could get yourself on the property ladder and become a homeowner, only you can decide what is right for you.