Purchasing a home with a deposit of less than 20%
As a general rule of thumb, lenders require a 20% deposit in order to secure a home loan. However, there are a number of ways to secure a loan with less than a 20% deposit in cash. Read our guide below to find out more.
First Home Buyers
If you’re buying your first home, each state and territory have different schemes available for first home buyers. Every state and territory participates in the national First Home Guarantee Scheme, which has the following general eligibility requirements:
applying as an individual or couple (married / de facto)
an Australian citizen(s) at the time they enter the loan
at least 18 years of age
earning up to $125,000 for individuals or $200,000 for couples, as shown on the Notice of Assessment (issued by the Australian Taxation Office)
intending to be owner-occupiers of the purchased property
first home buyers who have not previously owned, or had an interest in, a property in Australia
Under the FHBG, a property must be a ‘residential property’ to be considered eligible. Eligible residential properties include:
an existing house, townhouse or apartment
a house and land package
land and a separate contract to build a home
an off-the-plan apartment or townhouse
Use the postcode search tool to look up the property price caps for each location.
. Source: National Housing Finance and Investment Corporation
Guarantor Loans
A guarantor loan is when someone else is willing to guarantee your loan, meaning that if you are unable to pay back your loan, they will be responsible for making your repayments. A guarantor is often a family member, like a parent, and it is important that the guarantor understands their responsibilities and the risks of becoming a guarantor.
A guarantor is not required to make a cash payment for the loan. Instead, they offer up additional security for the loan, usually a percentage of the equity they have built up in another asset, such as their home.
For example, if you would like to purchase a home worth $1,000,000, but only have a 10% deposit in cash, you would normally be required to pay Lender’s Mortgage Insurance (LMI).
Instead, a guarantor may offer to support the other 10% of the deposit requirement ($100,000) from equity in their home.
It is important to note that in addition to being responsible should you not be able to make your repayments, a guarantor offering up a portion of their home equity as security for your loan will mean that their own ability to borrow or use equity for other purposes will be affected.
Find out more about becoming a guarantor on a loan here.
Gifts
If you have a family member or friend who has cash available and would prefer to support you through a cash gift instead of offering up their home equity as a guarantor on your loan, lenders will accept gifts as part of your deposit. A lender will normally ask for evidence that the cash has been given as a gift, such as a signed gift letter, stating that the amount has been given unconditionally without the need to be repaid.
Lender’s Mortgage Insurance
If you are unable to use a guarantor or gift to make up a 20% deposit, many lenders are willing to loan borrowers up to 90% or 95% depending on your serviceability capacity, employment status and the lender’s other policies.
Lender’s mortgage insurance will be added to the loan if the loan to value ratio (LVR) is above 80% (you’re borrowing more than 80% of the property value), which protects the lender against any losses they may incur should you be unable to repay the loan.
The cost of LMI depends on the amount you are borrowing, and is either paid upfront or capitalised into the loan. The more you contribute to the purchase price of your property, the lower the cost for LMI will be.
Profession-based LMI waiver
Some lenders have policies that allow people working in certain professions to secure a loan with a deposit of less than 20% without paying lender’s mortgage insurance. Eligible professions may include:
Doctors and medical professionals
Accountants and actuaries
Mining executives and experts
Lawyers, barristers and conveyancers
Professional athletes and entertainment professional
If you are employed in one of the above options, you can contact us at Unbroke to discuss your lending options.
Using home equity
If you already have a home loan and have paid down some of the loan, you may be able to use your home equity to purchase another property.
The equity in your home is the difference between the value of the property, and the loan amount you still have left to repay. For example, if your property is worth $1,000,000 and you still have a $600,000 loan, your home equity is $400,000. However, you can only borrow up to 80% of the property value. So your usable home equity would be:
$1,000,000 x 80% = $800,000
$800,000 - $600,000 = $200,000 in usable home equity
This $200,000 in equity could then be used as a deposit on another property, cover purchasing costs or to finance renovations.
How to apply for a loan with a deposit of less than 20%
If you don’t have a 20% deposit but would like to look at one of the above options to purchase a property, you can contact us to discuss your requirements. We’ll then work with you to understand which lenders may suit your needs.
