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Can I get a home loan without a 20% deposit?

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Saving up a deposit is one of the biggest hurdles involved in purchasing a home, and for many Australians, clearing it can seem almost impossible. Below, we explore some of the workarounds for homebuyers who don’t have the 20% deposit that banks like to see.

Do I really need a deposit of 20%?

It’s true that lenders prefer to deal with borrowers who have a deposit of at least 20% saved up. But that doesn’t mean they’ll turn you away if your deposit falls short.

Many lenders will let you borrow up to 95% of a property’s value so long as you take out lender’s mortgage insurance (LMI). This is a form of insurance which protects your lender if it turns out you’re unable to service your loan.

LMI is calculated on a sliding scale, so the lower your deposit (and, consequently, the more you have to borrow), the higher your LMI costs will be.

Fortunately, most lenders will have options for low deposit borrowers who can’t afford to pay LMI upfront, e.g. paying it off in instalments alongside your usual home loan repayments.

Should I take out a loan with a deposit of 5%?

A low deposit loan can help you get on the property market sooner, which can be beneficial if property values are climbing and you’re worried about being priced out. But it pays to be aware of the risks involved.

For starters, a smaller deposit means you’ll need to borrow more, which translates to more interest paid over the life of your loan.

The table below shows how much interest you can expect to pay when buying a $500,000 property with a deposit of various sizes.

Interest paid on a $500,000 property purchase at 5.00% p.a. over 25 years

Minimum depositMonthly repaymentsTotal interest paid
20% deposit$100,000$2,338$301,508
15% deposit$75,000$2,485$320,352
10% deposit$50,000$2,631$339,197
5% deposit$25,000$2,777$358,041

A low deposit also means that you will have less equity in your property during the early stages of your loan. This can cause problems if property prices fall and you wind up owing more on your loan than your property is worth. 

This is known as negative equity, and it can be an extremely difficult position to find yourself in. That’s because if your situation worsens and you’re forced to sell your home, the proceeds of the sale won’t be enough to cover your debt.

What are the alternatives?

If you’re looking for alternatives to borrowing with a low deposit, consider the following:

Boost your deposit with help from your family

If your parents have the means and are willing to assist you, they can step in to get your deposit over the line. Depending on their financial situation, they might be able to draw on their savings, superannuation, or money from assets they have sold.

Your lender might request a statement confirming the money was given unconditionally and there’s no obligation to repay it. If that isn’t the case and the money was loaned to you, it will be added to your list of liabilities and will ultimately affect how much you can borrow.

RELATED: Gifted deposits for home loans

Use a guarantor

Another option is to ask your parents or a family member to be your guarantor. This involves using their home or another property they own as additional security for your loan. 

While most lenders will be willing to accommodate this arrangement, there are plenty of risks involved, so make sure you and your guarantor seek out independent legal and financial advice before making any decisions.

Typically, guarantors will only need to provide enough security to get you past the 20% threshold banks like to see. So if you’re buying a $500,000 property and you’ve saved up 10% ($50,000), your guarantor will be asked to provide $50,000 worth of equity in their property to bring it up to 20%.

Once you’ve made enough progress on your loan that your LVR reaches 80%, or a rise in property prices pushes the equity you have in your home beyond that point, you can apply to have your guarantor released from the loan arrangement.

Use a government grant

You might also be eligible for one of the many government grants currently available. These programs are designed to help first home buyers and other groups who may struggle to buy a home.

Some of the grants and assistance programs you may be eligible for include: 

  • First Home Guarantee

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Niko Iliakis
Niko Iliakis
Money writer

Niko Iliakis is a finance journalist at Mozo specialising in home loans, property and interest rate movements. With an eye for facts and figures, Niko deep-dives into topics to help readers understand key info and make more informed financial decisions. He is ASIC RG146 (Tier 2) certified for general advice.