When it comes to home loan deposits, a 20% deposit is a magic number.
A 20% deposit makes it easier for you to get a home loan, and to do it without having to pay for expensive Lenders Mortgage Insurance (LMI), saving thousands on the cost of your loan. With a 20% deposit, most lenders will waive the need for LMI.
Can I really get a home loan with a 20% deposit?
A 20% deposit is the standard that Australian lenders ask for when considering a home loan application.
The benefits of having a 20% deposit when applying for a home loan are:
- Lenders waive LMI. When you apply with a 20% deposit, you are effectively reducing the risk to the lender of default and also showing that you are going to be a responsible borrower. That is why most banks waive the need for LMI, saving you thousands of dollars.
- You don’t need to find a guarantor. People who apply for home loans without the full 20% deposit may also seek a loan guarantor as a way to avoid paying for LMI. But if you have a 20% deposit you don’t need to bother with the hassle of a guarantor home loan.
- Easy to borrow up to 80% LVR. Most banks treat loans up to 80% Loan to Value Ratio (LVR) as safe territory. Because of your 20% deposit, lenders will happily approve your home loan without asking for guarantors or using the excessively stringent criteria they apply with smaller deposits.
Am I eligible for various government support schemes?
Most federal, state and territory government schemes in Australia support home buyers who have been unable to save up the 20% deposit most lenders typically ask for. If you have already saved up for your 20% deposit, you are most likely ineligible for government grants like the First Home Loan Deposit Scheme (FHLDS) or Family Home Guarantee (FHG).
However, you will still be eligible to apply for the First Home Owner Grant (FHOG) if this is your first home purchase, whether it’s a newly-built home or an existing one. You may be eligible for a FHOG of between $10,000 and $16,000. Visit firsthome.gov.au for your state or territory's details.
You may also want to take advantage of the First Home Super Saver Scheme (FHSSS), which enables first home buyers to use their super to save up for their home deposit. You can make up to $15,000 in tax-deductible voluntary super contributions per year for your home loan deposit. Read up on how to use your super to buy a house. Recent changes to the FHSSS can be found at the ATO’s First home super saver scheme page.
What do I need to show as a 20% deposit?
The type of deposit you will need to show depends on the lender. Some lenders ask you for proof of genuine savings which means money that has been in your account for at least three months. Other lenders may accept gifted deposits and other amounts they regard as non-genuine savings.
What other costs are there when buying a first home?
Saving for the home loan deposit is just one part of it. Buying a home includes a lot more expenses than that. Here are the other costs you must factor in to the costs of buying a home:
- Stamp duty on land transfer
- Conveyancing fees
- Removal costs
- Cost of renovations, if they are needed
- Council rates
What other government support schemes are available?
In addition to the FHLDS, FHG, FHOG and FHSSS already mentioned, here are some other options you should explore:
- Stamp duty and other concessions to first home buyers. Depending on where you live, you may be eligible for various state concessions for first home owners. Check your state or territory Revenue Office or Treasury Department web pages to find out whether you are eligible for these concessions: ACT, NSW, NT, QLD, SA, TAS, VIC, WA.
- Home ownership support initiatives. Being a member of a specific group may entitle you to home ownership support initiatives available for:
- Australian Defence Force (ADF) members and veterans
- Public servants (government employees)
- Casual workers
How can I compare home loans?
Here’s what you need to check when comparing home loans:
- Interest rate percentage. The rate of interest applicable to your home loan is a key factor in comparing loans. You will be given standard home loan interest rates if you have a 20% deposit. Saving up a bit more and lowering your LVR further (to less than 80%) would get you an even better rate of interest.
- Fixed or variable interest rate? Most lenders offer you a choice of fixed or variable interest rates. However, the fixed rate of interest is valid only for a few years and the loan reverts back to variable rates. A fixed rate gives more certainty to your budget, but fixed rate loans tend to be less flexible and have fewer features.
- Split loans give you the option of splitting the loan into fixed and variable elements.
- Principal and interest home loan. This means that each month you are paying off part of your loan principal as well as the interest on it.
- Interest-only home loan. This lets you pay only the interest portion on your home loan for a fixed period, for example up to five years.
- Repayment period. Ranges from 5 to 30 years.
- Offset facilities. Home loans that come with offset accounts allow you to reduce interest costs by leaving spare cash in an account whose balance is counted as a temporary reduction in the loan principal.
- Extra payment and redraw facilities let you park any extra money you do not immediately need in the loan account, to lower interest costs. If you need the money later, you can withdraw it.
- Additionalloan fees may include:
- Loan application fee
- Monthly account-keeping fee
- Annual package fee for extra features, such as a free credit card
- Fees on early repayment, for redraw, and on offset facilities
- Penalties for delayed payments
- Discharge fees for paying a loan off early
How can I make sure my home loan application will be approved?
The following points will help you strengthen your home loan application:
- Put together a complete and strong loan application. A rejected home loan application may reduce your credit score.
- Watch your credit score. Most banks expect you to be over a minimum credit score to qualify for a home loan.
- Reduce your expenses to make yourself appear more financially responsible and prepare for Household Expenditure Measure (HEM) scrutiny.
- The location and property type. Some lenders may have stricter conditions on loans for apartment purchases, or in certain postcodes. Before applying with any lender, you should find out about their criteria so you can avoid rejection. Even with your 20% deposit, choosing the wrong location or type of property may mean a higher deposit.
- Your employment history. A stable, long-term employment history will be viewed favourably. Self-employed and casual workers may have more difficulty, but can still qualify for loans.
- Your field of work also makes a difference. Certain preferred groups are eligible for special LMI waivers and smaller deposits because they belong to a category of low-risk borrowers. Visit our home loan comparison page and scroll down to our Guides section to find articles on concessions for your specific profession or trade.
- Consider working with a mortgage broker. Using a mortgage broker can help you save time and effort and identify lenders offering the best 20% home loans with the most attractive rates and loan features.