Can You Get a Home Loan With Less Than 20% Deposit?

A 20% deposit is standard in order to buy a house in Australia, but you can access other options if you’re willing to do your research and work with a good broker. 

Some lenders will approve loans with as little as five percent deposit, however there are trade offs when it comes to these offers.

Low deposit loans typically come with higher interest rates and may require you to take out lenders mortgage insurance (LMI). You can read more about LMI in our guide here.

That said, if you’re confident in your ability to repay your loan, and want to take advantage of government assistance like the First Home Owners Grant or First Home Buyer Guarantee, a low deposit home loan could be a great option for you.    

How much do I need for a home loan deposit?

A home loan deposit is usually 20% of the purchase price of your property. So, depending on the size, scale and location of your home, this can vary significantly.

For example, a studio or one bedroom flat which costs $500,000 will require a 20% deposit of $100,000. A five bedroom home in the same city might cost $3M and will require a $600,000 deposit. Other purchase costs include stamp duty and legal fees (more on these below).

Before you start your property search, it’s important to work out what kind of price range you should be looking at, based on your financial situation and how much you’re comfortable borrowing. 

Most major lenders provide free online affordability calculators, as well as repayment calculators to show how fluctuations in interest rates and loan terms could affect your repayments.

A 20% deposit is a standard number to aim for when buying a home, and it will certainly make it easier to borrow from major lenders, but having a smaller deposit does NOT exclude you from the property market and we don’t think it should stop you. 

I don’t have a 20% deposit. What can I do?

Although housing prices have dipped recently, we’re also living through a period of unprecedented inflation, making it harder to save for a home deposit. In fact, according to the ANZ CoreLogic Housing Affordability Report, the current estimated time to save a 20% deposit is 10.5 years — a record high and one of the most significant barriers to home ownership at the moment.

However, there are a number of lenders that can help you get into your first home with as little as 5% deposit.

How to buy a home with less than 20% deposit

Sure, lenders prefer a 20% deposit as proof of your savings ability and perceived risk level as a borrower, but there are other ways to secure a home loan. 

Keep in mind that there are strict rules and requirements around each of these options, so it’s important to read the fine print carefully to ensure you meet the criteria for each. 

1. Low deposit, high interest loan

A loan with less than 20% deposit will often be approved at a higher interest rate (up to 1.50% more) to borrowers with a greater deposit. You will likely also be asked to pay lenders mortgage insurance (more on this below).  2. Take advantage of the First Home Owners Grant (FHOG)

Each state offers different grants and schemes to help first home buyers get a foot in the proverbial (and physical) home owners' door. 

In NSW, for example, first home buyers are given $10,000 towards the purchase of a new home (or towards building costs for a new home), as well as a full or partial exemption on stamp duty. 

Applicants must meet certain requirements, but these grants can certainly be used towards your home deposit. 

3. Use your superannuation as your deposit

The First Home Super Saver Scheme allows you to make voluntary concessional payments (i.e., extra money paid on top of your mandatory super contributions) into your super account then withdraw it, along with any associated interest/earnings, at the end of a 12 month period. 

These contributions can form all or part of your deposit. 

4. Government guarantees

The First Home Buyer Guarantee enables first time home buyers to secure a loan with as little as 5% deposit, with an agreement that the government will secure the remaining 15%. 

This means that buyers can borrow without paying lenders mortgage insurance or higher interest rates.  

5. Guarantor home loan

A parent or relative can use the equity in their home to guarantee your loan. This means you may not need a deposit at all. Your guarantor can use the equity in their home to cover your deposit and your bank will cover the rest, meaning you avoid paying LMI and higher interest rates. 

It’s important to note here that although your guarantor doesn’t have to actually pay the deposit — the equity in their home just acts as a guarantee — if you default on your repayments they will be legally required to cover these costs. This may mean selling their home or coming up with a significant sum of money. 

What is Lenders Mortgage Insurance (LMI)?

Lenders mortgage insurance is a one-off payment that protects your lender from financial loss if you default on your repayments. The idea is that it reduces the risk to the lender of low deposit loans. 

Usually, if you can’t afford to pay your mortgage, the property will be sold to cover the unpaid value of your loan. However, if the sale of the property doesn’t cover the outstanding amount, your lender can access their LMI payment to cover their out of pocket costs.  

The cost of LMI can be paid either up front or added to the total amount of your loan (to be paid over time and at the same interest rate as your principal amount).

You should also note that LMI is usually non-refundable, which means that if you switch your loan to another lender in the future, you may be facing a brand new LMI fee. 

Our LMI Guide can be found here.

How much LMI will I pay with a 5% deposit?

LMI is calculated on the amount you borrow, the size of your deposit (a smaller deposit will require a larger LMI premium), your financial situation and whether you intend to live in your property or rent it out. 

At the end of the day, more risk for your lender will equal a higher LMI payment for you. 

For example:  new home owners borrowing with a 5% deposit on a $500,000 property will be required to make a one-off LMI payment of $14,871. This number jumps to $35,931 for a $900,000 loan.

What are the risks of buying a home with less than 20% deposit?

The costs associated with lenders mortgage insurance can add a considerable amount to either your upfront costs or the total amount of your loan (especially when added to your principal loan amount - remember you're paying interest on all the money your borrow). 

What’s more, strict conditions apply to all of the low deposit loan options and government assistance programs listed above. 

That said, saving for a 20% deposit is incredibly difficult given the current cost of living, so if you can meet the criteria of a low deposit option, and you can make your repayments on time each month, the rewards of buying a home with less than 20% deposit can outweigh the risks. 

Can I get a home loan without any deposit at all?

A no deposit home loan means that your lender approves you for 100% of the property value. 

Although most lenders will require at least some form of deposit in order to guarantee a loan, some loans will be approved based on equity in a guarantor’s property. In this instance, a guarantor (usually parents or a close relative) will put up their home as equity, allowing you to borrow 100% of the purchase price for your new property. 

Again, if you default on your repayments, your guarantor is liable for the full loan amount which may place their own property at risk. 

Alternatively, if you already have a property, you can use your home equity as a deposit by refinancing your existing loan. 

Are there any other costs to keep in mind when buying a home?

When the gavel falls, you’re looking at some hefty hidden costs as a new homeowner. In fact, there’s more to buying a home than the cost of the house itself. 

Stamp duty:

Stamp duty is a tax charged on property exchanges in Australia and payable within three months of signing a contract of sale. 

The amount of stamp duty that you pay will depend on the value of the property or transaction. In most cases, stamp duty is calculated as a percentage of the total sale price of your new property. 

In NSW, if you’re buying a house for $500,000, you will need to pay $17,835 in stamp duty. However, some states have zero or discounted stamp duty for first home buyers. It's worth checking with your local State Recovery office (SRO) or broker to see if you’re eligible for any exemptions.

Conveyancing fees:

Conveyancing is the name given to the legal process of buying and selling property. This includes things like property and title searches and exchanges, contracts of sale and other legal actions to ensure that the property you purchased is really yours. 

These fees are charged by your lawyer and can number in the thousands. 

The bottom line: Is a low deposit home loan right for me?

Before you make any decisions, it’s important to understand the pros and cons of taking out a low deposit loan. This way, you can decide if it’s the right option for you.

Pros of a low deposit loan:

A low deposit loan helps you get into the property market sooner. If you don’t have a huge deposit saved up, it might take you a while to reach that 20% goal. Taking out a low deposit loan means you can potentially take advantage of government subsidies and support schemes to offset your risk.

Cons of a low deposit loan:

If you don’t qualify for government subsidies or can’t find a guarantor, you’re looking at higher interest rates and lenders mortgage insurance. And because you’re borrowing a larger amount of money and paying a higher interest rate, you could add thousands of dollars to your repayments over the life of the loan.

If you’re not sure whether a low deposit loan is right for you, our experts at Compare Club can help. We weigh up home loans from our 50+ strong panel of lenders to find the right one for your needs. We’ll also help you through the entire application process, so you can focus on finding your dream home sooner.

Speak to a mortgage broker to explore your options today.

Anthony Stevenson, is the head of home loans at Compare Club. With over a decade of experience under his belt, Anthony is dedicated to helping individuals make informed decisions when choosing a home loan. Whether it's finding a great deal on your home loan or refinancing, Anthony has a wealth of knowledge in the space.

Meet our home loans expert, Anthony Stevenson

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