Is a 20% deposit necessary? Getting a home loan with a smaller deposit

Struggling to save up a 20% deposit for a property? You may be pleased to know that it is still possible to get a foot on the property ladder in Australia without a large deposit.

Despite recent news of property price decreases, the value of a home in capital cities and many regional areas is still at eye-watering levels, making saving up a 20% house deposit a tall ask for many Australians. Especially when a 20% deposit often equates to a six-figure sum for most house prices, and wage growth has stayed somewhat stagnant for many years in comparison.

So, how true is the old adage that you need to save a 20% deposit to gain home loan approval? You may be surprised to discover that you could still qualify for a home loan with a deposit as little as 10%, even 5% in some instances.

 

Why does a 20% property deposit matter?

Firstly, it’s worth understanding why experts recommend that borrowers save up a deposit of at least 20% for their property. This is because without a deposit of this size you will typically be asked to pay Lender’s Mortgage Insurance (LMI).

LMI is an insurance designed to protect a lender in the unfortunate event a borrower were to default on the mortgage. Lenders may also look more favorably on borrowers with bigger deposits, being more likely to approve them for a home loan and offer them a more competitive interest rate. But keep in mind, choosing the right home loan lender is just as important as having a larger deposit in making sure you have the most competitive home loan for your financial situation and personal objectives.

LMI can cost borrowers thousands, if not tens of thousands of dollars, depending on the purchase price of the property. However, first time buyers may not be aware that, unlike stamp duty, this is not an upfront cost you must pay upon loan approval, and you can actually add this charge to your mortgage.

This will mean that your loan amount is increased, and the amount of interest you pay over the total loan term could be significantly higher than if you paid it upfront or saved a 20% deposit. In many instances, the interest you’re charged over the life of the loan on a higher mortgage size can be greater than the initial LMI cost.

But for buyers hoping to purchase property with a smaller deposit, wondering why this 20% figure is so significant, it is worth keeping in mind that LMI can be added to your mortgage if needs be.

 

How to get a home loan with a smaller deposit

If you want to purchase a property but a 15%, 10% or 5% deposit is more realistic for your budget, there may still be home loans available to you, as well as options to boost your borrowing power.

When you have a 10% deposit…

Many Australian home loan lenders approve home loan customers with deposits of 10%, including lower rate home loan options from Reduce Home Loans.

Reduce Home Loans offers two competitive 90% LVR home loan options for owner-occupiers and investors (note rates accurate as of time of writing):

You may want to keep an eye out for descriptions like “90% LVR” when searching for a 10% deposit home loan, which is a reference to your loan-to-value ratio. Your LVR is the difference between the property value and the size of your mortgage, expressed as a percentage. For example, if you have $50,000 saved for a 10% deposit for a $500,000 property, your LVR would be 90%.

Put simply, despite what your family and friends may say, you can still get a home loan with a deposit of 10%. You just will need to be aware of the risks of applying for a home loan with a low deposit, such as:

  • Paying LMI,
  • Being offered a higher interest rate, or
  • Facing higher home loan repayments comparatively if interest rates increased.

When you have a 5% deposit…

There are a number of government incentives available to first home buyers to help them purchase property in the current property market, such as the first home owner grant and stamp duty exemptions and concessions.

Some schemes are designed with smaller deposits in mind, including the New Home Guarantee (previously called the First Home Loan Deposit Scheme). This scheme allows first home buyers to gain loan approval and purchase a property with a deposit of as little as 5%. The government acts as a guarantor on the loan supporting it up to 15% so that you do not need to pay LMI.

Further, single parents may also qualify for a home buyer scheme with only a 2% deposit thanks to the Family Home Guarantee. This scheme works similarly to the New Home Guarantee, in that the government supports the home loan application, acting as guarantor so single parents do not need to pay LMI even with a deposit of just 2% of the home’s value.

Reduce Home Loans’ Economizer 95 Home Loan is available for owner occupied purchases up to 95% LVR including LMI, at 3.19%p.a. variable (3.24%*p.a. comparison).

 

Boosting your chances of mortgage approval with a smaller deposit

If you have a smaller deposit and want to apply for a home loan, there are some options you may want to consider to potentially boost your chances of approval, including:

  • Genuine savings – If you make regular savings into a savings account over a period of time (at least 3-6 months), this is called genuine savings, and is something that lenders look for in their lending criteria. Even if you don’t have a 20% deposit, showcasing you can responsibly save your income with a savings plan over a period of time may boost your chances of home loan approval.
  • Excellent credit – Having an excellent credit score will always look favourably to borrowers, regardless of the size of your deposit. Consider working on improving your credit score before you apply for your home loan.
  • Guarantor – Applying with a guarantor (typically a family member) lets them use the equity in their own home as security on the mortgage. In some instances, you may be able to get loan approval with no deposit with a guarantor or even pay less interest.
  • Pay off your debts – Paying off your debts (and reducing your expenses full stop) is one way you may be able to boost your chances of loan approval and your borrowing power. Having debts, such as a credit card bill or car loan, can impact how a lender views your application.

 

Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.

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(29)    For the Rate Cutter Variable where the borrower pays $1170 upfront fees then a corresponding loyalty discount of 0.10% p.a. off the Rate Cutter Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(27)    For the Investor Rate Slasher Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Slasher Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(26)    For the Low Rider Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(25)    For the Economizer Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Economizer Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(24)    For the Super Saver Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.10% p.a. off the Super Saver Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(23)    For the Super Saver Variable where the borrower pays an upfront fee of $1170 then a corresponding loyalty discount of 0.15% p.a. off the Super Saver Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(22)    For the Economizer Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.11% p.a. off the Economizer Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(21)    For the Investor Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(18)    For the Home Owners Dream 1 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(20)    For the Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(14)   For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(12)   For the Investor Rate Lovers Interest Only where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.07% p.a. off the Investor Rate Lovers Interest Only rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(11)   For the Wealth Maximizer 3 year fixed Principal & Interest where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(10)    For the Wealth Maximizer 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(9)    For the Home Owners Dream 3 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(8)    For the Home Owners Dream 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(7)    For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(6)    For the Investor Rate Buster Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Investor Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(5)    For the Rate Buster Variable where the borrower pays an upfront fee of $150 then a corresponding loyalty discount of 0.05% p.a. off the Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(4)For the Rate Slasher Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.08% p.a. off the Rate Slasher Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(3) For the Investor Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Lovers Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(2)For the Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Rate Lovers Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(1) For the Low Rider Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(28) For the Rate Crusher 1 Year Fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.05% p.a. off the Rate Crusher reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(19) For the 1 Year Fixed Wealth Maximizer where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the 1 Year Fixed Wealth Maximizer reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.