Do you really need a 20 per cent deposit before applying for a home loan?

Often, you’ll hear people say that you need a minimum 20 per cent deposit before a lender will approve a home loan. While it’s accurate that lenders often prefer to limit their exposure to less than 80 per cent, it’s possible to be eligible for a home loan even if you don’t have a 20 per cent deposit.

What are the benefits of paying a 20 per cent down payment before taking out a mortgage?

A larger deposit means you’ll borrow a lower amount, which helps reduces the total interest paid during the loan term, potentially saving you a significant amount over the years.

When you borrow more than 80 per cent of the loan-to-value ratio (LVR), Lender's Mortgage Insurance (LMI) is compulsory. This is insurance to protect the lender if you default on the loan and are unable to make timely repayments. However, the LMI expense is borne by you, and increases the overall cost of the home loan. The lower your deposit, the higher the LMI cost, potentially reaching tens of thousands of dollars. Saving a 20 per cent deposit eliminates the need to pay this extra cost.

Lenders require you to submit proof of your savings for three months or longer. This is usually a bank statement showing regular deposits to your savings account. With a larger amount saved for the home deposit, you’ll be able to show excellent savings history, which reduces the risk for your lender.

The lower the loan amount, the less risk assumed by the lender. If the lender is confident of your ability to make repayments, this can increase your borrowing power, allowing you to borrow a larger amount.

With a larger deposit and lower LVR, you may be eligible for special rates and deals that can help you save even more money over the loan term. You may also have a wider range of home loan choices to help you find the best offer for your needs.

What can you do if you don’t have a 20 per cent down payment?

The lender will require LMI if you don’t have a 20 per cent deposit, and you'll need to cover the cost. The LMI premium is often paid upfront, though some lenders will let you add it to your home loan. However, this means your loan may cost you more over time.

Some lenders may approve a home loan with a family guarantee when you don’t have a 20 per cent down payment. In this case, your family members such as parents, siblings, or grandparents can use the equity in their own home as additional security for your home loan, giving the lender extra protection.

When should you buy a home with a lower deposit?

There are several benefits of making a 20 per cent down payment when taking out a mortgage, as it reduces the size of your loan. However, if you’re unable to save 20 per cent towards the home deposit, or if property prices are constantly increasing, you may want to consider buying a home using a lower deposit, such as 10 per cent or even 5 per cent.

The minimum deposit amount required varies from one lender to another. If one of these loans also includes features and benefits that could help you achieve your goals, a low deposit home loan could suit your needs. Just keep in mind that there may be extra costs involved when buying a home with a lower deposit, or you may need to get a guarantor involved. 

If you’re not sure about how to proceed, consult an expert such as a mortgage broker for guidance.

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