Can You Buy a Home With Less Than a 20% Deposit?
A 20% deposit is often treated as the standard target when purchasing a home, but it is not always the minimum amount required.
Depending on the lender, property and your financial circumstances, you may be able to apply for a home loan with a deposit of less than 20%. Some lenders may consider eligible borrowers with deposits as low as 5%, although a smaller deposit can result in additional costs, stricter lending requirements and a larger home loan.
The important question is not simply whether you can purchase with a smaller deposit. You also need to understand how the deposit may affect your loan-to-value ratio, Lenders Mortgage Insurance, repayments and overall financial position.
Why Is a 20% Deposit Commonly Recommended?
A larger deposit generally reduces the amount you need to borrow.
For example, if you purchase a property for $700,000:
A 20% contribution towards the purchase price would be $140,000
A 10% contribution would be $70,000
A 5% contribution would be $35,000
These figures do not include additional purchasing costs such as transfer duty, conveyancing, inspections, lender fees, moving costs or other expenses.
A 20% deposit may help you:
Avoid Lenders Mortgage Insurance in many circumstances
Reduce the size of your home loan
Reduce your regular repayments
Pay less interest over the life of the loan
Begin with more equity in the property
Access a wider range of potential loan options
However, saving a larger deposit can take time. During that period, property prices, interest rates, personal circumstances and lender policies may change.
There is no universal rule that waiting until you have exactly 20% will always produce the best result. The potential costs and risks of purchasing sooner should be considered against the time required to continue saving.
What Is Your Loan-to-Value Ratio?
Your loan-to-value ratio, commonly called your LVR, compares the amount you are borrowing with the lender-assessed value of the property.
It is generally calculated as:
Loan amount ÷ property value × 100 = LVR
For example, if a property is valued at $700,000 and you borrow $630,000, your LVR would be 90%.
A higher LVR generally means the lender is providing a larger proportion of the property’s value.
The lender may consider this a higher-risk loan because the borrower begins with less equity. As a result, the loan may be subject to additional requirements, different pricing or Lenders Mortgage Insurance.
The lender will generally use its accepted valuation of the property when calculating the LVR. If the valuation is lower than the purchase price, you may need to contribute more money than expected.
What Is Lenders Mortgage Insurance?
Lenders Mortgage Insurance, commonly called LMI, is generally a one-off insurance cost that protects the lender if a borrower cannot repay the home loan and the lender experiences a financial loss.
Although the borrower commonly pays the premium, LMI does not protect the borrower or make repayments on their behalf.
LMI may apply when the borrower is seeking to borrow more than 80% of the property’s value. The exact requirement and premium will depend on the lender, mortgage insurer, loan amount, LVR and application.
The premium may need to be paid upfront or, where the lender allows it, added to the home loan.
Adding LMI to the loan may reduce the amount required upfront, but it increases the loan balance. This could mean paying interest on the LMI amount for as long as it remains part of the loan.
Does a 10% Deposit Always Mean You Can Borrow 90%?
Not necessarily.
Having savings equal to 10% of the property price does not mean every dollar can be used towards the deposit.
You may also need money for:
Transfer duty
Conveyancing or legal fees
Building and pest inspections
Loan application and settlement fees
Property valuation costs
Title registration charges
Lenders Mortgage Insurance
Moving expenses
Repairs, furniture or immediate property costs
A financial buffer after settlement
For example, if you have $70,000 saved for a $700,000 property but require part of that money for purchasing costs, your actual contribution towards the property price may be less than 10%.
A mortgage broker can help estimate the total funds you may need before you begin making offers.
Other Ways to Purchase With a Smaller Deposit
Pay Lenders Mortgage Insurance
Some lenders may approve an eligible borrower with a smaller deposit where LMI is paid.
This could allow you to purchase sooner, but you should consider the premium, larger loan balance and additional interest that may apply.
Use a guarantor arrangement
Some lenders allow an eligible family member to provide additional security for part of the home loan.
This may reduce the effective LVR and could allow the borrower to avoid LMI, depending on the structure and lender requirements.
A guarantor takes on a serious financial and legal obligation. If the borrower cannot repay the loan, the guarantor may become responsible for the guaranteed portion.
Both the borrower and guarantor should obtain independent legal and financial advice before proceeding.
Consider an eligible buyer scheme
Eligible buyers may be able to purchase with a smaller deposit through a government-backed deposit or shared-equity arrangement.
These programs may have requirements relating to income, property value, previous property ownership, occupancy and participating lenders. Availability and eligibility requirements can change, so the current rules should be confirmed before relying on a scheme.
Use equity from another property
Existing property owners may be able to use available equity towards another purchase.
Available equity is not automatically the same as usable equity. The lender will still assess the existing property’s value, the debt secured against it, the proposed lending and the borrower’s ability to meet repayments.
Receive a gifted deposit
Some lenders may accept funds gifted by an eligible family member.
The lender may request evidence confirming the source of the money and whether it needs to be repaid. Genuine-savings requirements may also apply, depending on the lender and proposed LVR.
What Else Will the Lender Assess?
A deposit is only one part of a home loan assessment.
The lender may also consider:
Your employment and income
Regular living expenses
Existing loans and liabilities
Credit card limits
Dependants
Credit history
Savings history
The proposed property
The purpose of the loan
Your ability to manage the repayments
The lender’s current credit policies
A larger deposit does not guarantee approval, and a smaller deposit does not automatically mean an application will be declined.
The lender will assess the complete application and determine whether it meets its eligibility, credit and serviceability requirements.
What Are the Risks of Purchasing With a Smaller Deposit?
Purchasing with a smaller deposit may allow you to enter the property market sooner, but it may also create additional financial pressure.
Potential considerations include:
A larger home loan
Higher repayments
More interest over the loan term
LMI or other higher-LVR costs
Less equity at the beginning of the loan
Greater exposure if property values fall
Less money available for unexpected expenses
The possibility of paying LMI again if you refinance without enough equity
If you needed to sell shortly after purchasing, the property sale proceeds may also need to cover the outstanding loan, selling expenses and any other secured amounts.
Property prices are not guaranteed to increase, so purchasing with a small deposit should not be based solely on an expectation of rapid capital growth.
Is It Better to Buy Now or Keep Saving?
There is no single answer that applies to every buyer.
Buying with a smaller deposit may be worth considering when:
You can comfortably manage the proposed repayments
You have allowed for all purchasing costs
You will retain an appropriate financial buffer
You understand the LMI and interest costs
The property and loan align with your longer-term plans
You satisfy the lender’s requirements
Continuing to save may be more appropriate when:
The proposed repayments would place pressure on your budget
You would have little or no money remaining after settlement
A slightly larger deposit could significantly reduce LMI
You expect your income or employment to change
You have higher-interest debts that could be reduced first
You need more time to strengthen your savings or credit position
The decision should be based on affordability and your individual circumstances rather than pressure to enter the property market immediately.
How Can a Mortgage Broker Help?
Different lenders can have different requirements for smaller-deposit applications.
A mortgage broker can help you:
Calculate your proposed LVR
Estimate the total funds required
Explain whether LMI may apply
Obtain an indicative LMI estimate where available
Compare suitable options through their lender panel
Review genuine-savings requirements
Discuss possible guarantor structures
Check whether an eligible buyer scheme may be relevant
Explain the repayments, costs and limitations
Prepare and submit the loan application
A mortgage broker cannot guarantee that a smaller-deposit application will be approved. The lender and, where applicable, the mortgage insurer will make the final decision.
Speak With Homefront Mortgages
You may not need to wait until you have saved a full 20% deposit before exploring your options.
Homefront Mortgages can review your savings, estimated purchasing costs, proposed LVR and borrowing position to help you understand what options may be available through our lender panel.
We can also explain the potential cost of LMI and compare how different deposit amounts may affect your loan balance and repayments.
We do not represent every lender or home loan available in the market. Loan approval, LMI requirements, interest rates, loan amounts and applicable conditions are determined by the lender and, where relevant, the mortgage insurer.
Important Information
This article provides general information only and does not constitute personal financial, credit, tax or legal advice. It does not take into account your objectives, financial situation or individual needs.
Loan approval is subject to lender assessment, eligibility requirements, satisfactory documentation, acceptable property security, valuation and applicable lending criteria.
LMI premiums, deposit requirements, government programs, interest rates, fees, credit policies, terms and conditions vary and may change. Fees and charges may apply.
Any figures and examples are illustrative only and do not represent an offer, quotation, approval or estimate of finance.
