Last Updated: 26th May, 2021

Why You Don’t Really Need A 20% Deposit For Home Loans (and Why It’s Recommended)

Published by Otto Dargan on May 21, 2021

There’s a myth that you need a 20% deposit before applying for a home loan. At least once, as a prospective borrower, you’ll hear that you need a minimum saving of 20%.

Well, we’re here to tell you that you don’t have to save that much, but we’ll also tell you why it is recommended that you do.

What if I don’t have a 20% home loan deposit?

There are many ways to get a home loan with a much smaller deposit. However, you may incur additional costs or complications.

A deposit of less than 20% is considered high risk by most lenders. Despite that, there are some that can lend you more than 80% of the value of a property, sometimes even more than 90%.

Popularly called ‘low-deposit home loans’, these kinds of loans are also known as high Loan-To-Value Ratio (LVR) home loans.

If you qualify, you can pay as little as 3% for your deposit on a home loan.

To find out whether you might be eligible for low-deposit home loans, read the stories at the following links, where we talk about low-deposit home loans in detail:

Alternatively, you can give us a call on 1300 889 743 or fill in our online enquiry form to find out if you qualify.

One of the extra costs of a low-deposit home loan is Lenders Mortgage Insurance (LMI), which protects the lender in the event that a borrower defaults.

To visualise this, let’s suppose you’re looking to buy a $600,000 property and you only have a 10% deposit ($60,000) saved up. With the help of LMI, the right lender might allow you to take out a home loan with as little as a 5% deposit if you’re going to be an owner-occupier or 10% if you’re an investor.

That sounds like a good alternative, right? But here’s the downside: you will have to bear the cost of LMI. On top of that, your home loan will become more expensive.

For illustration, suppose you buy a property worth $500,000 and borrow $450,000 (90% of the property’s value), you will have to bear an extra $9,610 LMI cost, as per our LMI calculator.

Usually, at this point, most home buyers start to question whether to use LMI or wait and save a larger deposit. You can explore this topic in detail here.

A Brief Breakdown: Buy and Pay LMI Now or Save a Larger Deposit?

The answer to this question is highly dependent on the market itself.

If the market is booming, it is logical to pay upfront LMI, as the property value will increase over time and your deposit will need to match that as well. You’d want to get in before the price tag goes up, right?

But if the market isn’t growing in value, you should probably wait and save a larger deposit.

Did you know having a bigger deposit (lowering your LVR) will give you the best deal on your home loan? We’ll discuss this further in just a while.

But before we do that, let’s discuss more ways to avoid needing a 20% deposit for a home loan.

Using the First Home Loan Deposit Scheme to Avoid Paying LMI

Using the First Home Loan Deposit Scheme, first-home buyers can get a home loan with deposits as low as 5% without paying LMI.

For this scheme, the government acts as the mortgage insurer, guaranteeing home loans for eligible first-home buyers with a minimum deposit of 5% of the property value.

Speaking of guaranteeing loans, a guarantor loan is another way you can get a low-deposit home loan without paying LMI.

Guarantor loans: Using Guarantors to Buy Without a Deposit

In the First Home Loan Deposit Scheme, the government acts as the guarantor. You can use other guarantors for your home loan, who will provide a guarantee secured on their property. In most cases, it’s your parents.

Guarantor loans cost less than standard home loans and allow you to buy without any deposit. On top of that, you can often borrow over 100% of the property value.

To learn more or to find out if you qualify for a guarantor loan, fill in our online enquiry form or give us a call on 1300 889 743.

Why a 20% Deposit is Recommended

A bigger deposit equals the best deal

Any home loan in which the amount does not exceed 80% of the property value is a low-LVR home loan.

  • These are famous for having the cheapest home loan rates, as the risk for the lender is lower when the LVR is lower.
  • If you have a 20% deposit, in addition to getting a better interest rate, you won’t have to pay for LMI, saving you thousands more dollars.
  • The home loan process is often much quicker and more efficient as well.

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