Buying a Home with Less Than a 20% Deposit: What Are Your Options?

Home Loans

8 Oct

Buying a home with less than a 20% deposit is absolutely possible in Australia today. There are a few different paths you can take depending on your situation: government guarantee schemes, a family guarantor, low-deposit mainstream loans with Lenders Mortgage Insurance or specialist lenders that accept higher loan-to-value ratios. I’ll walk you through the practical options, the trade-offs you should know about, and what matters most when you choose a route.

Government guarantee schemes: get in with 5% deposit

The federal Home Guarantee Scheme has been expanded recently so more first home buyers can purchase with as little as a 5% deposit and avoid paying Lenders Mortgage Insurance in many cases. The scheme sets property price caps and eligibility rules but removes the LMI cost for eligible applicants which can save thousands up front. It is aimed primarily at first home buyers and has seen changes to place limits and price caps as the government adjusts the program.

Use a guarantor or family pledge

A family member can act as a guarantor by offering part of their home equity as security. That means you can often avoid LMI and borrow with a smaller deposit because the lender has extra security. It can be a quick way to get into the market but carries real risk for the guarantor because their property may be on the line if repayments fall behind. The arrangement needs clear paperwork and open conversations about responsibilities, what happens if the guarantor wants their equity back, and how long the guarantee will stay in place.

Low deposit loans and Lenders Mortgage Insurance explained

Most mainstream lenders allow loans with LVRs up to 90% or 95% which means you can borrow with a 10% or 5% deposit. If your LVR is above 80% you will often pay Lenders Mortgage Insurance or use a government guarantee to avoid it. LMI is a one-off premium that protects the lender if a borrower defaults and typically costs in the low single digit percentages of the loan amount depending on LVR and loan size. Some lenders let you roll the LMI into the loan so you do not pay it upfront but that increases your loan balance and interest costs over time. It is important to get estimates so you understand the real monthly cost of borrowing with a smaller deposit.

Specialist and non-conforming lenders

If you do not meet strict mainstream lending rules there are specialist lenders and non-conforming products that accept lower deposits or unusual income situations. These loans can be more expensive and may have different fees and features, so they suit people who need flexibility and can tolerate higher costs. It is worth weighing the extra interest and fees against the benefit of entering the market sooner. Comparison between lenders for 90 to 95 LVR products is essential so you know the cheapest and safest option for your profile.

Practical trade-offs to consider

Repayments: smaller deposits mean higher repayments and more interest over the life of the loan.
Equity buffer: less equity makes you more vulnerable to negative equity if prices fall.
Costs up front: LMI or fees for specialist lenders can be significant. Some government guarantees reduce these costs but have eligibility rules.
Flexibility: guarantor arrangements can be removed later as you build equity but this is not guaranteed.

Conclusion

There is no single right answer for everyone when buying with less than 20% deposit. Government guarantees can remove LMI for eligible first home buyers and open the door with a 5% deposit. Guarantor loans and low-deposit mainstream products are solid alternatives but come with trade-offs like higher repayments, LMI or risks for the guarantor.

Specialist lenders exist for unusual situations but usually at a higher cost. The best route depends on your income, family support, tolerance for risk and how soon you want to move from renting to owning. If you focus on clear comparisons of total costs, realistic repayment scenarios and the risks each option carries you’ll make a decision that fits your circumstances.