How to get a home loan with less than a 20% deposit

It’s commonly said you need a 20% deposit to qualify for a mortgage. However, more than three in ten new home loans actually have smaller deposits, according to the latest data from APRA, the banking regulator.

There are five main ways borrowers can buy a property with less than a 20% deposit.

Lenders mortgage insurance

A common method is to pay lenders mortgage insurance (LMI), which lenders generally charge when a borrower has a loan-to-value ratio above 80%. Often, borrowers are able to add the LMI premium to their loan, so they don’t need to pay it upfront. 

While paying LMI results in higher borrowing costs, it can actually be cheaper in the long run, because in the extra time required to save a full 20% deposit, property prices might increase by more than the current LMI premium.

Guarantor home loan

Another way to enter the market with a small deposit is to use a guarantor – who would usually be a parent or close relative and who would own a home with a significant amount of equity.

The guarantor can pledge their equity to cover some or all of the borrowers’ deposit, which allows the borrower to reduce their own deposit contribution to as little as 5% or even 0%.

(Guarantor home loans are covered in greater detail later in the newsletter.)

First Home Guarantee and Regional First Home Buyer Guarantee

The First Home Guarantee is a federal government scheme that supports first-home buyers to purchase a property with a 5% deposit without paying LMI.

Criteria apply, including:

• Applicants must be first-home buyers or must not have previously owned, or had an interest in, an Australian property in the past 10 years.
• Applicants must be owner-occupiers.
• Applicants must earn less than $125,000 for individuals or $200,000 for couples.
• The value of their property cannot exceed a certain threshold (which varies from state to state). 

The Regional First Home Buyer Guarantee is almost identical, but the property being purchased must be in a regional location.

Family Home Guarantee

The Family Home Guarantee is a federal scheme that supports eligible single parents or single legal guardians of at least one dependent to purchase a property with a 2% deposit without paying LMI.

Applicants do not have to be first-home buyers, but they must be owner-occupiers and earn less than $125,000 per year. Property price caps also apply.

Equity

If you own property with sufficient equity, you can borrow against that equity and use it to fund the deposit on an investment property.

That way, although you might still put down a 20% deposit, you could potentially cover the whole thing with equity (if you have enough equity in the property); in other words, you might not need to contribute any cash.