If you cannot save enough money for a 20% deposit when you're buying a home, you are going to be searching for low deposit home loans. Many Australian home loan lenders will only approve standard home loans where applicants have a 20% deposit, but it doesn't mean that you can't get home loans with low deposit savings. There are plenty of ways to boost your deposit so that it reaches the lender's requirements, or to meet extra conditions so that your loan is approved despite your low deposit.
A good credit rating will help you with low deposit home loans
It's important to understand that a good credit rating is one of the best tools available to low deposit borrowers. A good credit score assures the lender that you are financially disciplined and are likely to do everything you can to keep up with your loan repayments. It won't guarantee you a loan, but it will help to tip the scales in your favour.
Your credit score is a numerical expression of the data in your credit report, the history of your financial behaviour as an individual collected by Australia's three credit reporting agencies. The lender is certain to check your credit rating when you apply for a loan, so get in ahead of the game and check your score yourself, free of charge.
LVR and the 20% deposit preference
When you apply for a home loan with a specific property in mind, the lender will almost certainly have the property valued by a professional valuer. This allows the lender to work out the maximum loan amount they are prepared to extend, secured against the property. Lenders prefer a maximum Loan-to-Valuation Ratio (LVR) of not more than 80%.
What this means is that, if you were looking to buy a home for $1,000,000, and the valuer agrees that it is in fact worth $1,000,000, the lender's maximum loan amount would be $800,000, and you would have to provide a 20% deposit of $200,000. But if the valuer thought that the property was worth only $900,000, the maximum loan amount (with no extra security or insurance attached) would be only $720,000, and you would have to find a deposit of $280,000.
Banks like to have this 20% margin of comfort in case of problems with the loan, such as the borrower not being able to keep up with repayments and defaulting, or ending up with negative equity (owing more to the lender than the property is worth). They need to protect themselves against dips in property prices, which, although they are usually short-term, could see them losing money if they need to repossess a property in the early years of a loan's term. Lenders are also obliged to do their best to make sure you will be able to afford your monthly repayments when approving a loan, and a bigger deposit will certainly make the repayments more affordable.
Ways to boost your deposit to 20%
In the current low interest rate environment there are no true high-interest savings accounts to make your deposit grow quickly by adding interest earned. So, you need to consider these alternative methods to make that deposit grow.
Boost your deposit by using your super
The ATO will give you concessional tax treatment if you save for your first home deposit by making pre-tax contributions to your superannuation fund. This means that you will be able to save faster, and when you need the funds for a home loan deposit you can apply to have them released, up to a maximum of $30,000. You can also make after-tax, non-concessional contributions.
See the details at First Home Super Saver Scheme. We recommend consulting an accountant before you decide to use this method.
Boost your deposit with the First Home Owner's Grant
You can take advantage of a First Home Owner Grant (FHOG) available from most states and territories. The most generous cash grants are for new builds (up to $25,000) rather than existing homes. Many states also have stamp duty concessions for property title transfers when you're buying a home for the first time, meaning that you can put more of your savings towards a loan deposit rather than setting money aside to pay stamp duty. See details at firsthome.gov.au and, for New South Wales, at First home buyer grant and assistance.
Boost your deposit with a gifted deposit
If you're really fortunate, a close family member (again, usually a parent) may be able to give you a lump sum that will swell your deposit to the 20% required. There's more to this than having the bank of Mum and Dad just hand over the cash. There are qualifications and conditions to meet, and pros and cons to consider. We strongly suggest you read our guide to gifted deposits.
Ways to avoid the 20% deposit requirement
If you still can't reach that magic 20%, even by considering saving in your super fund or by applying for a First Home Owner Grant, there are still several ways to get approved for low deposit home loans.
Loan guarantor
Asking a family member (usually one or both of your parents) to guarantee a part of your loan is a popular way to get loan approval with a low deposit. Your parent(s) will need to own their own home (located in Australia), or have a substantial equity in it, because the lender will want to use their property, or a part of it, as extra security for your loan. If your guarantor can cover enough of your loan, you won't have to pay for Lenders Mortgage Insurance (see below).
Here's how it works. Let's say you want to buy a $750,000 property but have saved up only $100,000 as a deposit so far. You're $50,000 short of the lender's 20% deposit requirement of $150,000. Your parent could offer to guarantee $50,000 of your loan by offering their own property as security, and the lender will want to take possession of their title deed and put a charge on it for that amount. Once you have achieved 20% equity in your home (by making loan repayments and/or because property prices have increased) you can apply to have the charge removed and the title deed for their property returned to your guarantor.
Becoming a loan guarantor is a big step, because a guarantor puts their own property in the firing line for repossession if the borrower they are guaranteeing is unable to keep up with loan repayments, and if they can't cover the amount owing themselves. Most lenders insist on prospective guarantors getting legal advice before signing a loan guarantee.
More details are available in our guide to guarantor home loans.
Lenders Mortgage Insurance
If a loan guarantor is not an option for you, you can still qualify for low deposit home loans. If you can demonstrate a history of saving for a deposit, and you have a good credit score and an income high enough to meet your loan repayments, many lenders will approve your loan if you agree to pay for Lenders Mortgage Insurance (LMI).
This is an insurance policy that protects not you, but the lender, if you fail to meet your loan repayments and they find it necessary to repossess your home in order to recover their costs. If your equity in the home is less than 20% (as a result of your low deposit) there's a good chance they may not be able to recover all their costs, and they will be able to make a claim against the LMI policy.
LMI is not cheap, but you can often have the cost added to your loan, so that you pay it off over the life of your loan. You can find out more about it in our Lenders Mortgage Insurance guide.
First Home Loan Deposit Scheme
The federal government will act as guarantor for up to 15% of the deposit for loans for a limited number of first home buyers, removing the need to pay for LMI, under the First Home Loan Deposit Scheme (FHLDS). The 2020-21 federal budget made an additional 10,000 places available under this scheme, specifically for first home buyers intending to purchase or build a new property.
