So, you’re dreaming of buying a home, but that 20% deposit everyone talks about feels out of reach. You’re not alone. Many Aussies are in the same boat, thinking they need to save a huge deposit before they can consider buying a home.

Before diving into deposit sizes, it’s crucial to understand the role of home loan pre-approval . Getting pre-approved tells you how much you can borrow and strengthens your position when making an offer.

The good news is buying a home with less than a 20% deposit is possible. In this article, we’ll break down what that could look like for you. We’ll dive into the pros, the cons, and everything in between. We explore what you need to know to help you decide if a smaller deposit is the right move for your situation.

What’s the 20% deposit rule?

The 20% deposit rule is often considered the gold standard when buying a home. The rule is that if you can put down 20% of the property’s value upfront, you might avoid lenders mortgage insurance (LMI) . And possibly secure a lower interest rate .

But why is 20% the magic number? It’s about risk. Lenders see a higher deposit as less risky, so they’re more likely to offer favourable loan terms. With a 20% deposit, your loan-to-value ratio (LVR) is lower, which can improve your borrowing power and overall affordability.

However, saving 20% can take time, especially with rising property prices. This delay could mean missing out on market opportunities. But a larger deposit could reduce your mortgage size, leading to lower monthly repayments and less interest paid over time.

A 20% deposit is not the only path to homeownership. Exploring different deposit sizes and their impacts is key to finding the right fit for your financial situation.

Are there options for buying with less than a 20% deposit?

Yes, there are. If a 20% deposit isn’t realistic, here are other options you might consider:

Low deposit home loans

Low deposit home loans let you buy a home with as little as 5% or 10% of the property’s value. If saving a 20% deposit feels impossible, these loans can help you get into the market faster.

But it comes with a cost. Low deposit loans usually come with higher interest rates and extra fees. Lenders might also be pickier, looking for a solid credit history and steady income.

A smaller deposit also means borrowing more. This can bump up your loan costs over time. So, while these loans can be a great option, make sure you’re clear on the conditions and how they work with your objectives.

Lenders mortgage insurance (LMI)

Lenders mortgage insurance (LMI) is a cost you might face if your deposit is less than 20%. It protects the lender in case you can’t repay the loan. LMI can be a significant expense, often running into thousands of dollars, depending on your loan amount and deposit size.

The cost of LMI is usually added to your loan, meaning you’ll be paying interest on it over time. This increases the total cost of your mortgage. While LMI allows you to buy with a smaller deposit, consider its impact on your long-term financial plans.

First Home Guarantee Scheme

The First Home Guarantee Scheme is a government program that can help you get into your first home with just a 5% deposit. Under this scheme, you can skip the costly LMI which means lower upfront costs.

To be eligible, you need to be an Australian citizen or permanent resident. The scheme is mostly for first-time home buyers who meet certain income and property value limits. It’s designed to make buying your first home a bit easier, especially if saving a big deposit has been tough.

This scheme can be a real boost for first-time buyers, making homeownership more within reach. Just make sure you’re eligible and that it fits well with your goals.

Guarantor loans

Guarantor loans let you get a boost from a family member, usually a parent, who uses their property as security for your loan. This can also help you skip LMI and might even score you a better interest rate with a smaller deposit.

To qualify, the guarantor needs to own property with enough equity and be in good financial shape. They’re on the hook if you can’t keep up with repayments, so it’s a big commitment.

The upside? You get into the market faster and save on LMI costs. The downside is your guarantor’s property is at risk if things go wrong.

It’s crucial to have a clear, honest conversation with your guarantor about the risks and benefits. Consider seeking legal or financial advice to make sure everyone’s on the same page before moving forward.

What are the financial implications of a smaller deposit?

Opting for a smaller deposit can help you buy a home sooner, but it comes with several financial trade-offs:

• Higher interest rates : Lenders may charge higher rates because they view smaller deposits as riskier, leading to more interest over time.
• Increased loan-to-value ratio (LVR) : A higher LVR can impact your borrowing power and the terms of your loan, potentially limiting your options.
• Higher monthly repayments : Borrowing more means your regular payments will be higher, which could stretch your budget further.
• More interest paid overall : With a larger loan amount, the total interest paid over the life of the loan will increase, adding to the cost.

Understanding these trade-offs helps you compare the benefits of entering the market sooner with the long-term financial impact of a smaller deposit.

What are the advantages and disadvantages?

Buying a home with less than a 20% deposit comes with pros and cons. Here’s a quick overview to help you weigh your options:

Potential pros:

• Faster entry into the market : A smaller deposit means you can buy a home sooner, potentially before prices rise further.
• Lower upfront costs : You need less money upfront, which can make homeownership more accessible, especially for first-time buyers.
• Opportunity to build equity sooner : Owning your home earlier allows you to start building equity instead of continuing to rent your home .
• Access to government schemes : You might qualify for initiatives like the First Home Guarantee Scheme, which can reduce costs and make buying more feasible.
• Greater lifestyle flexibility : Getting into a home sooner can offer stability and control over your living situation, such as renovating or customising your space.

Cons:

• Higher interest rates : Smaller deposits often result in higher interest rates, increasing the overall cost of your loan.
• Lenders mortgage insurance (LMI) : If your deposit is below 20%, you may need to pay LMI, adding to your total expenses.
• Increased loan-to-value ratio (LVR) : A higher LVR can limit your borrowing power and lead to stricter loan conditions.
• Higher monthly repayments : A larger loan amount can result in higher monthly repayments, which could stretch your budget.
• Greater long-term costs : The combination of higher interest rates and LMI can lead to paying significantly more over the life of the loan.
• Potential financial strain : Higher monthly payments might limit your disposable income, affecting your lifestyle choices, such as travel or entertainment.
• Less buffer for emergencies : With a smaller deposit, you might have less savings for unexpected expenses or financial setbacks.

Considering these pros and cons can help you decide whether buying with a smaller deposit aligns with your financial situation and lifestyle goals.

What are the impacts of different deposit sizes?

To bring this to life, let’s explore three hypothetical buyers purchasing homes with different deposit sizes—5%, 10%, and 20%. Each scenario looks at how their choices can potentially impact costs, repayments and financial stability.

Scenario 1: 5% deposit

Alex wants to buy a $500,000 home but only has a 5% deposit ($25,000). Alex qualifies for a loan but must pay lenders mortgage insurance (LMI), which adds $10,000 to the loan. The interest rate is higher due to the low deposit.

• Loan amount : $485,000 (including LMI)
• Monthly repayments : Higher due to the larger loan and higher interest rate
• Total interest paid over 30 years : Significantly higher due to the larger loan and increased interest rate
• Financial stability : Alex’s budget is stretched, leaving less room for savings or unexpected expenses

Scenario 2: 10% deposit

Taylor is also looking to buy a $500,000 home but has saved a 10% deposit ($50,000). Taylor still needs to pay LMI, but it’s lower than in Alex’s case. The interest rate is slightly lower.

• Loan amount : $455,000 (including lower LMI)
• Monthly repayments : Lower than Alex’s but still higher than with a 20% deposit
• Total interest paid over 30 years : Less than Alex but more than with a 20% deposit
• Financial stability : Taylor’s budget is more comfortable, with some room for savings and emergencies

Scenario 3: 20% deposit

Jordan manages to save a 20% deposit ($100,000) for a $500,000 home. With this deposit, Jordan avoids LMI altogether and secures a lower interest rate compared to Alex and Taylor.

• Loan amount : $400,000 (no LMI required)
• Monthly repayments : Lower than Alex and Taylor’s, providing more financial flexibility
• Total interest paid over 30 years : Lower due to a smaller loan and better interest rate
• Financial stability : Jordan has the potential more financial security, with a comfortable budget (all things being equal) and room for additional savings

Note : These outcomes are hypothetical and can vary based on individual circumstances, and can vary based on income and expenses. Interest rates and LMI costs are also subject to change.

These scenarios illustrate how different deposit sizes can impact your loan, repayments, and overall financial health. Understanding these differences can help you make a more informed decision when buying a home.

Is a smaller deposit the right choice for you?

Buying a home with less than a 20% deposit is possible, but it comes with trade-offs. Smaller deposits can get you into the market faster, but they often lead to higher costs, including interest rates and LMI. Each option affects your loan, repayments, and financial stability differently. It’s important to weigh these factors carefully against your situation and long-term financial goals.

The right choice is whatever works best for you. Take a close look at your options, consider the risks, and choose the path that aligns with your goals and comfort level.