Saving up for your deposit can be daunting, whether you’re a first home buyer in Australia or a seasoned property pro. With the average home deposit being 20% of the property's value, this can be a major challenge - this amount sits well over six figures, and will continue to increase as Australian interest rates rise.
Don’t say goodbye to your dream home just yet!
There are paths to homeownership with home loans for low deposit holders, and even no deposit loans. You could have your foot on the property ladder in no time.
So how exactly can you buy a property with no deposit?
What are my loan options if I have no deposit?
There is actually more than one way to get into the property market, depending on whether you have any upfront deposit or no deposit whatsoever.
No deposit home loans
- Guarantor home loan: A home loan where a loved one or family member acts as a guarantor, offering home equity as security for your loan.
- Gifted deposit: A home loan where a loved one or family member pays the deposit upfront as a gift.
Low-deposit home loans
- 5% deposit home loan: A low-deposit home loan may be offered by certain lenders, allowing you to borrow 95% of the property’s value. Look for loans with a low minimum deposit or a high loan-to-value ratio (LVR).
There are other pathways for boosting your deposit, as well. You may consider early access to your superannuation. Alternatively, you may be eligible for the First Home Owner Grant (FHOG). Each state has their own variation on a first-home buyers scheme, so this is definitely worth looking into if you are a first-time buyer.
Lenders Mortgage Insurance (LMI)
If you are looking to take out a low-deposit home loan, it’s important to remember lenders mortgage insurance. This is a one-off fee paid by the borrower to protect the lender in case they cannot recover the loan amount.
LMI is usually required if you take out a loan with a higher LVR than 80% and can be extremely costly.
What is a guarantor home loan?
A guarantor home loan is the truest form of a deposit home loan because it involves someone else (usually a family member) using their equity to secure you a loan. It is possible for them to pledge a full 20% deposit, which will qualify you for most standard home loans with 80% LVR.
Alternatively, you can contribute a smaller deposit - 5%, for example - and your guarantor can top up the remainder in equity to meet a 20% deposit.
This means that you also won’t have to pay (or can minimise) lenders mortgage insurance since you’ll be paying over the minimum deposit.
Rather than lending you money, a guarantor is contributing to your deposit via equity in their home as security. They take on liability if you default on your monthly repayments.
How much can I borrow with a guarantor home loan?
You can borrow around 110% of the property price with a guarantor home loan. This means you can potentially have enough to cover not just the purchase price but also other initial costs like stamp duty or conveyancing.
Although you are able to borrow that much, not all applicants will choose to. The more you borrow, the more interest you will pay over the life of the loan.
How do I get approved for a guarantor home loan?
While individual eligibility criteria may vary, there are some things that will help you get approved for a guarantor home loan.
- Stable employment: A lender will want to know that you can make repayments, and for that, they’ll want to see that you have an income and stable employment.
- Good credit score: Providers will want to see that you have a strong credit history, from any personal loans to timely credit card payments. Getting your credit score into the best shape possible will make you more attractive from a lender’s perspective.
- Guarantor equity: Your lender will be checking to make sure that your guarantor has sufficient equity in their homes.
What is a gifted deposit?
It probably doesn’t get much better than the gift of a deposit on a new home! If a loved one or family member fronts up your deposit, that is referred to as a “gifted deposit”. This can form either the whole deposit or a part of it and can allow you to apply for a home loan with a lower loan-to-value ratio.
About 60% of first-home buyers receive some financial contributions to help purchase their property, so a gifted deposit will come as no surprise to a lender.
Are there any catches with a gifted deposit?
When you are using gifted contributions to purchase a property, there are some things to remember.
- You may need to prove that the money was received as a gift. This is to stop people from using borrowed money as their deposit, like taking out a personal loan or withdrawing from a credit card.
- You may need to show evidence of genuine savings. “Genuine savings” refers to money that you have personally saved up over time. If you are using gifted money to put down a deposit, your lender will want evidence that you are capable of making repayments with your own money.
- Your credit score will still be checked - so if you have a history of defaulting on loan repayments, a generous gift might not be enough to get you over the line. A strong repayment history will put you in the best position for your home loan application.
If the gifted deposit does not meet the 20% recommended deposit, you may also have to factor in lender’s mortgage insurance.
What is a low-deposit home loan?
If you do have some savings to contribute towards your deposit, there are also low-deposit home loan options available. Many lenders have options that allow you to start with a deposit between 5-15% of the property’s value, as opposed to the standard 20%.
Doing this will require you to borrow more money and choose a home loan with a higher LVR, which may also mean higher interest rates or stricter lending criteria.
Are there any catches to a low-deposit home loan?
Keep in mind that while a low-deposit loan might be easier to afford now, higher interest rates will be reflected in your monthly repayments over the life of the loan.
You will also be required to pay lender’s mortgage insurance (LMI) based on the higher risk factor presented to a lender.
Due to this heightened risk factor, the application process is also more likely to be lengthy and require much more supporting documentation. Be prepared to do a bit more work than you might have with a larger deposit!
What help can I get as a first home buyer?
If this is your first time in the property market, there are schemes in place throughout Australia to help make real estate a more attainable goal. You may see any of the following terms used as shorthand, all of which represent assistance for first home buyers in Australia:
You may also see mention of the First Home Super Saver (FHSS) scheme, but this refers specifically to voluntary superannuation contributions made which you can request withdrawal of in order to buy your first home.
How much is a First Home Owner Grant?
Different states have different regulations surrounding their first home owner grants (FHOG). It consists of $10,000-$20,000 for first-time buyers.
In NSW, for example, the $10,000 FHOG may be used by first-time buyers who buy or build their first new home (valued at less than $750,000) or purchase a new or significantly renovated home (valued at less than $600,000).
These grants are generally to be used for owner occupiers only and are not valid for investment property purchases.
Am I eligible for a First Home Owner Grant?
Like the FHOG itself, eligibility criteria are different from state to state. In general, though, eligibility will require that you are:
- Aged 18 or over
- A citizen or permanent resident of Australia
- Have never previously owned property in Australia
- Intend to live in this property for 6 months or more
Some states may also have requirements regarding the property you are purchasing. This may mean that it has to be new or significantly renovated, or that it must not exceed a certain property value.
What is a First Home Guarantee and am I eligible?
The First Home Guarantee was introduced in 2021 and ensures housing spots are available to a set number of Australian first-time buyers, often with low-deposit home loans. This first home loan deposit scheme aims to make housing more accessible.
Keep in mind that to qualify you will need at least a 5% deposit (while the government fronts the remainder of the deposit). You will not need to pay LMI in this instance.
There is other eligibility criteria, including:
- Aged 18 and over
- First home buyers (if applying as a couple, both must be first home buyers)
- Intending to be owner-occupiers
- Singles with a taxable annual income of below $125,000 (for couples, the combined taxable annual income must be below $200,000)
There are also price caps for different capital cities and areas in Australia, so make sure to check before you go planning.
Between 1 July 2022 and 30 June 2023, there are 35,000 spots held for the First Home Guarantee.
Are there any other forms of low-deposit home loans?
We’ve covered most of the major options if you’ve got no deposit or a low deposit, but there are a couple of other schemes in place worth looking at for very specific scenarios.
The following both operate in accordance with the First Home Guarantee scheme, and dedicated allotments are subject to change each year.
What is the Family Guarantee and am I eligible?
Designed to help get single parents into housing, the Family Guarantee offers you the ability to secure housing with one of the lowest deposits possible.
There are 5,000 home guarantee slots for applications between 1 July 2022 and 30 June 2023.
It requires a minimum 2% deposit with the remainder of the deposit guaranteed by the government and no LMI payable, on any residential property. Price caps do apply, as well as the following eligibility criteria:
- Applicants are single
- Applicants have at least one dependent child
- Applicants do not currently own an existing property or home
What is the Regional Guarantee and am I eligible?
In a similar vein but focused on regional areas, there is a 10,000-slot home guarantee available under the Regional Guarantee between 1 July 2022 and 30 June 2023.
This is another option for low-deposit home loan holders, specifically buying property in regional areas. The minimum deposit is 5% with the remainder of the deposit guaranteed by the government and no LMI payable.
You don’t need to be a first home buyer to be eligible for the regional home guarantee, but you can’t have owned real estate in the past 5 years.
Should I save up for a bigger deposit?
You’ve done your research and thoroughly scoped out the options available to you with no deposit available. You’ve taken note of ways to scrounge up that little bit extra for a low-deposit home loan to get you to the next level.
Why would you ever save up a 20% deposit?
The more money you put up now, the closer you are to owning your own home. The more money that you borrow, the more interest that you will pay, and the more likely you are to feel the impact of that in your monthly repayments.
The less debt you carry, the less likely you are to find nasty marks on your credit history. The better it looks on future applications, such as if you find yourself looking to refinance.
There are other costs to remember with your home loan, beyond the deposit and application fees. Depending on whether you opt for a fixed-rate or a variable-rate loan, your monthly repayments could be set to change over the life of the loan. You may also be paying an introductory rate that will expire (this is why it is always wise to check the given comparison rate for a more realistic view of the interest rate you will be paying).
It is also worth looking at the difference between interest-only home loans, and principal and interest loans. An interest-only loan may have reduced repayments for a set period of time. At some point over the life of the loan you might want ito consider refinancing, which could completely change the loan conditions and home loan repayments.
While the temptation may be there to go for the low deposit home loan route, it may work out easier over the life of the loan to take that bit of extra time now - be it in saving up, applying for grants (like the FHOG), or seeing if any gifts are coming your way.