Do You Need to Have a 20% Deposit for a Home Loan?

Struggling to fund a 20% deposit on a home? You may be relieved to learn that getting a foot on the property ladder in Australia without a significant investment is still doable.

Despite recent reports of property price declines, the value of a home in major cities and many regional locations remains at eye-watering levels, making saving a 20% housing deposit complex for many Australians. 

However, you might be shocked to learn that you can still qualify for home loans with as little as a 10% deposit, or even 5% in some cases.

The Importance of a Property Deposit

It’s essential to understand why experts recommend that borrowers save at least a 20% deposit for their homes. Without a deposit of this level, you will often be required to pay the Lender’s Mortgage Insurance (LMI).

LMI is insurance that protects a lender in the unfortunate event that a borrower defaults on the mortgage. Lenders may also see applicants with more significant deposits favourably, making them more likely to accept them for a house loan and offer them a more competitive interest rate. 

However, selecting the appropriate house loan provider is just as crucial as having a higher deposit in ensuring you have the most competitive home loan for your financial condition and personal goals.

Depending on the purchase price of the property, LMI can cost borrowers thousands—if not tens of thousands—of dollars. However, unlike stamp duty, this is not an upfront expense that must be paid upon loan approval, and you may add this amount to your mortgage.

Home Loans with a Smaller Deposit

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

First-time home buyers can take advantage of various government incentives to assist them in purchasing property in today’s market, including the first-time home buyer grant and stamp duty exemptions and concessions.

Some programs, such as the New Home Guarantee, are created with modest deposits. This program enables first-time home buyers to obtain loan approval and purchase a home with as little as a 5% deposit. The government acts as a guarantor on loans, guaranteeing up to 15%, so you don’t have to pay LMI.

Improve Your Chances of Getting Approved

If you have a modest deposit and want to apply for a house loan, you may want to examine the following choices to increase your chances of approval:

• Genuine savings – Put consistent contributions into a savings account over time. Even if you don’t have a 20% deposit, demonstrating that you can adequately save your income with a savings plan over time may increase your chances of house loan approval.
• Outstanding credit – Borrowers will always view having a good credit score favourably, regardless of the size of your deposit. Consider focusing on boosting your credit before applying for a house loan.
• Guaranteed – Applying with a guarantor allows them to utilise the equity in their property as mortgage security. In some cases, you may be able to secure a loan with no deposit or even pay less interest if you have a guarantor.
• Pay off your debts – Paying off your debts is one method you may increase your chances of loan approval and borrowing power. 

Conclusion

There’s no doubt that saving for a hefty property deposit is difficult in today’s market. However, you are not doomed if you want to buy a home or investment property yet do not have 20% to deposit. Consider getting pre-approval from a bank or mortgage broker before starting your property search so that you know your home loan options and how much you need to save.

Are you a first home buyer in Australia? Shore Financial is Australia’s #1 independent mortgage brokerage. Talk to a broker today!