Can you buy a home with a deposit less than 20%?

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Applying for a loan, First home buyer, Understanding home loans

In the vibrant landscape of Australian property, the quest to secure a slice of the dream with less upfront can often feel like navigating a maze. With property prices presenting a formidable challenge, the traditional goal of saving a 20% deposit before even considering a mortgage application might seem out of reach for many. But what if we told you that the path to homeownership might not require such a steep initial outlay? At The Happy Finance Company, we're here to share some insights and alternatives that could turn your home ownership dreams into reality sooner than you think.

Why do lenders love a 20% deposit?

First off, let's delve into why the 20% deposit has been held in such high regard. When assessing a home loan application, lenders take a closer look at your financial health, which includes your income, credit history, assets, debts, and the size of your deposit. A 20% deposit ticks several boxes for lenders:

Demonstration of Saving Discipline: It shows you have the financial discipline to save a significant amount, indicating good money management skills.
Reduced Lending Risk: The more you put down upfront, the less the lender has to finance, reducing their risk.
Lower Borrower Debt: With a larger deposit, you'll borrow less and therefore owe less over the life of your loan, potentially securing a more favorable interest rate.
Immediate Equity: Starting with a 20% equity stake in your property gives you a comfortable buffer should property values fluctuate.

Loan to value ratio: Explore how the Loan to Value Ratio (LVR) impacts your borrowing power and the terms of your home loan, offering key insights to navigate your mortgage options more effectively

How much can you borrow?: Discover how much you can borrow for a home loan, so you can plan your budget and understand your financial capabilities in the property market.

The challenge of a smaller deposit

Achieving a 20% deposit is a commendable goal, but it's not always feasible for everyone. This doesn't mean your home ownership dreams are out of reach. It's essential to be aware of the implications, such as potentially needing to pay Lenders Mortgage Insurance (LMI), which protects the lender if you're unable to repay your loan. The cost of LMI can vary and typically increases as your deposit size decreases.

Despite these challenges, there are still pathways to owning a home with a smaller deposit.

Strategies for securing a home loan with less than 20% down

First home guarantee: The Australian Government’s First Home Guarantee scheme is a beacon of hope for first-time buyers, allowing them to purchase a home with as little as a 5% deposit. This initiative aims to fast-track homeownership by providing a government guarantee for the remaining portion of the 20% deposit, thus eliminating the need for Lenders Mortgage Insurance (LMI). It’s an excellent way to get into the property market without the hefty upfront cost.

Regional home guarantee: Designed with regional Australia in mind, the Regional Home Guarantee opens doors for those wishing to buy outside metropolitan areas. Like its counterpart for first-time buyers, this scheme enables potential homeowners to buy with just a 5% deposit, with the government covering up to 15%. It’s a fantastic opportunity for those looking to embrace a regional lifestyle or find more affordable housing options.

Family home guarantee: Single parents have a unique opportunity through the Family Home Guarantee. With a minimal deposit requirement of 2%, this program supports single parents in purchasing a home, covering up to 18% of the deposit. This initiative acknowledges the challenges faced by single-parent families and offers a helping hand towards securing a stable and happy home.

First home owners grant: The First Home Owners Grant is a one-time grant provided by the Australian government to encourage and assist first home buyers. While the grant amount varies by state and territory, it can significantly bolster your deposit, making it easier to reach the 20% threshold or reduce the amount you need to borrow. It’s an invaluable resource for first-timers looking to break into the housing market.

Paying Lenders Mortgage Insurance (LMI): While traditionally seen as a last resort, LMI can actually be a strategic tool for buyers with smaller deposits. It protects the lender in case of default but also enables buyers to proceed with a purchase with as little as a 5% deposit. Although it comes with an additional cost, it can be capitalized into the loan, allowing you to spread the cost over the life of your mortgage.

Guarantor home loan: A guarantor home loan can significantly ease the deposit requirement. In this arrangement, a family member or close associate offers their own property as security for your loan. This not only helps in meeting the deposit criteria but can also avoid the need for LMI. It’s a powerful option for those with supportive networks able to provide this level of assistance.

Financial gift: Receiving a financial gift from family can also help meet deposit requirements. Whether it’s a contribution towards the 20% or enough to cover it entirely, lenders will accept this form of deposit, provided there’s no expectation of repayment. This approach can fast-track your journey to homeownership, especially when combined with other savings.

Professional home loan: Certain professionals, such as doctors, lawyers, and accountants, may be eligible for home loans with preferential terms. These can include reduced LMI or even waived deposit requirements. Lenders view these professions as low-risk due to their stable and high earning potential, making them more willing to offer flexible loan options.

Specialist lenders: Exploring options with specialist lenders can uncover unique loan products tailored to those with smaller deposits. Some of these lenders offer loans with less than 20% down without the need for LMI, focusing instead on your ability to repay the loan. A specialist lender might provide the perfect solution for your circumstances, making it worth a conversation with a mortgage broker.

At The Happy Finance Company, we're passionate about making your home ownership dreams a reality, regardless of the size of your deposit. Our team is ready to guide you through these options and more, ensuring you find a pathway to a home that brings you happiness and security. Reach out to us today, and let’s embark on this exciting journey together.