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“I can’t get a home loan unless I’ve got a 20% deposit, nothing else will do.”
It’s one of the great misunderstandings about getting your first home loan.
Yes, a 20% deposit to purchase your first home may help you get a better deal on your loan, but It’s a big hurdle to meet for those of us who are not already in the property market, particularly with all the other fees added in. While there’s no denying the extensive upfront costs of purchasing a home or investment property, the idea of needing a 20% deposit is misleading. Here’s why…
Why 20%?
It’s a great way to show the lender that you have the financial capacity to meet the requirements for the loan you’re applying for.
With a smaller deposit, the perceived risk to the lender increases. They want to see that you can and will make repayments for the life of the loan and the larger deposit helps them feel confident that you can save and are therefore less of a risk. The bigger the deposit, the smaller the LTV (loan-to-value ratio) and the more likely you are to get that loan.
Because of this, even if a lender is willing to give you a low-deposit loan, there will likely be more costs involved. You are more likely to have to accept higher interest rates and you will pay an insurance premium called Lenders Mortgage Insurance (LMI).
This is why many investors wait until they have that 20% deposit – it will mean lower interest rates, lower repayments, no LMI and a lower total loan cost.
But for those of us who can’t wait, there are still many options out there so stay focused – with a little research you may find a strategy that will help you get and keep that property. Let’s take a look at some possibilities.
Getting a loan with less than 20% deposit
If you want to buy before you reach that 20% mark then you can absolutely and completely get a loan with a smaller deposit.
Let’s take a look at some strategies that will help you get and keep that property.
1) Shop around
As Mark Bouris says, “It comes down to research and finding out what different funders are doing at certain times. There always has been, and there always will be a 95% loan option somewhere in the marketplace, always.”
Some lenders will allow deposits of down to 15% or less with a Low Deposit Home Loan. There are even no deposit loan options out there but they come with certain risks.
Lower deposit loans can come with higher fees and a LMI requirement but they will get you out of the renting cycle, into the property market and get you building equity, all of which is a great foundation for your financial future. It’s worth noting that some lenders are more likely to offer lower deposit loans to certain professions, such as the military or medical professions.
These loans are not always actively advertised or may be through less well known lenders or support schemes, so it’s definitely worth doing your research.
“With lender’s mortgage insurance, the Federal Government First Home Buyers Scheme and family guarantee loans, there’s all sorts of ways of getting into the property market without a 20% deposit. It might cost you a little bit more, and you might have to pay lender’s mortgage insurance, and you might have to pay a slight premium on the interest rate, but it shouldn’t be an impediment for people getting into the market,” says Bouris.
“LMI is not ideal as it’s quite expensive and people think ‘Why would I pay dead money?’ That’s because it’s lender’s insurance so it doesn’t insure you, the borrower, it’s insurance for the lender in case you, the borrower, default and a loss is realised on your property sale. It’s an insurance policy in case things go south. It can be expensive, but it provides you with the opportunity to get into the market earlier than you would have otherwise been able to.”
Brokers and other mortgage professionals will know what options are out there and may have access to lenders that the average investor does not.
2) Accept help from friends or family
This is not an option for all of us, but if you have a close friend or family member who is already in the property market with a little available equity in their home, they might be willing to act as a family guarantor or take out a shared equity agreement (SEA) or shared equity mortgage.
These can be great strategies for entering the market and can mean significant savings for the new homeowner. Look at options like a family guarantee or a shared equity agreement to assist you in your first purchase if you’re fortunate enough to have support.
3) Take advantage of government grants
There are a variety of government-assisted programs out there that can help you access that home loan, particularly if you are a first home buyer with a lower taxable income.
These are mostly federal schemes that are determined and funded by each state or territory. This means that the requirements and conditions are the same or similar from state to territory but things like the price caps will change.
In NSW, for example, there is an assistance of $10,000 dollars paid to first home owners purchasing new build properties of less than $600,000. If there is a land and home contract then the total combined value cannot exceed $750,000.
Each state government has its own home buyer assistance schemes in place, as well as the federal government. These grants can be difficult to navigate on your own, so it’s always best to seek advice from a professional mortgage broker.
It’s worth noting that the concessions and grants available will depend on your personal circumstances, such as whether you are buying an investment property or your first home. Here’s a list of helpful links for you to explore:
- NSW Home Buyer Assistance
- Victorian Home Buyer Assistance
- QLD Home Buyer Assistance
- Tasmania Home Buyer Assistance
- WA Home Buyer Assistance
- ACT Home Buyer Assistance
- South Australia Home Buyer Assistance
- Northern Territory Home Buyer Assistance
What to do next?
So now you know that you definitely don’t need a 20% deposit to get into your own home. But what do you do next?
Well, knowing you aren’t locked out of the property market if you can’t get that 20% deposit is a big mind shift, so stay proactive and stay positive!
Mark Bouris recently said that for many first home buyers out there, the most positive step you can take on your property journey is to chat with a mortgage broker.
“A broker can help you here as you need to decipher how much deposit you put in because the mortgage insurance can be quite expensive,” said Bouris.
“It’s very much a broker thing to decipher which lenders have which loan-to-value ratios and what the mortgage insurance cost is of each individual lender, because it’s different with different lenders.
A mortgage broker or other property professional will be able to help you sort through the options and get you started, and they’re usually free – so an honest conversation can save you a lot and get you into the property market sooner.
