How to get a home loan without a 20% deposit

Photo by: Andre Taissin on Unsplash.
A piggy bank and some coins on a brown surface.

If you’re looking for a home loan, you’re probably thinking about your deposit. This deposit is an important part of getting your home loan, as it determines how much you can borrow from a lender and therefore what property you can buy. So, what’s so important about a 20% deposit?

With property prices and the cost of living in many areas on the rise, it can be difficult to save up a 20% deposit for a home loan. But waiting to save this deposit can mean you have to wait longer to enter the property market and spend more money on your home loan in the long run. So, what’s the alternative?  

Banks will now approve your home loan application if you have less than a 20% deposit on the condition that you pay Lender’s Mortgage Insurance. This can help you get your dream home faster, but can restrict how much you can borrow.

In this article, we’ll explore what Lender’s Mortgage Insurance is and ways of avoiding LMI even without a 20% deposit. We’ll also explain how a broker can help you navigate LMI and determine your best option if you want to avoid it:

  • What is Lender’s Mortgage Insurance?
  • Can I avoid paying Lender’s Mortgage Insurance without a 20% deposit?
  • What if I’m not eligible for home loans for professionals?
  • Who can help me with Lender’s Mortgage Insurance?

If you’re looking for an estimate of how much Lender’s Mortgage Insurance you’d be required to pay on your loan, use our LMI Calculator.

What is Lender’s Mortgage Insurance?

In the past, banks would not approve loans for customers who could not provide a 20% deposit as the loan was considered to be too risky. However, banks have recently changed their lending criteria to allow customers without a 20% deposit to borrow, on the condition they pay the bank for Lender’s Mortgage Insurance.

Lender’s Mortgage Insurance (or LMI) is a one-off payment you make to a lender when applying for a home loan with less than a 20% deposit. Banks organise their own LMI and set their own LMI rates, meaning they can differ between lenders. Ultimately, this insurance cost protects your lender if, at a later time, you’re unable to pay back your loan. Therefore, it’s an insurance that protects the lender, not the customer.

Currently, some banks are offering loans to customers who can provide as little as 5% of the home’s value if they’re an owner or occupier or 10% if they’re an investor. This means that if your property was worth $1 million, you would require $50 000 as an owner/occupier or $100 000 as an investor to qualify for your loan. Alternatively, you could provide a $250 000 deposit (20%) and avoid paying LMI altogether

Although paying LMI, this one-off payment is still quite expensive. For example, if your property was worth $1.2 million, you would have to pay around $25 000 in LMI in order to qualify for the loan without a 20% deposit. These deals also often come with other restrictions and requirements, so it’s important to consider all your options before deciding on the loan for you.

Can I avoid paying LMI without a 20% deposit?

There are some instances where banks will reduce LMI costs or waive them completely on their loans. Many lenders are currently advertising a range of home loans for professionals which offer LMI waivers, which could save you tens of thousands of dollars on your loan.

The reason these discounts are offered to professionals is because they are considered “low-risk borrowers.” This means their income is often high and their profession has a good track record of paying loans off on time, particularly in the case of doctors.

Here are some examples of the discounts different professionals are eligible for:

These LMI waivers are usually offered in addition to other discounts, such as cashbacks and exclusive interest rates. There’s really never been a better time to determine whether you’re eligible for a home loan for professionals, which could save you tens of thousands on your home loan.

For more information on home loans for professionals, including doctors, engineers, lawyers and IT professionals, explore our other articles or get in touch with one of our brokers, who can answer all your questions.  

What if I’m not eligible for home loans for professionals?

If you’re not eligible for home loans for professionals with reduced or no LMI, there is another way to avoid paying LMI.

A family guarantee loan allows another person to use one of their assets to secure your loan and provide your lender with extra protection if you default on your loan. This person is usually a close family member and the asset is usually a house, more specifically, the equity that person has earned on this house.

Usually, your guarantor (the person providing their asset) only has to provide this security until you reach a certain threshold. For example, if you provide a 5% deposit on your loan, the equity on your guarantor’s home may need to be 15% of the home’s value in order to reach a total of 20%. This family guarantee is usually released once you pay a certain amount on your loan or if the market changes.

If you think this type of loan could be suitable for you, read our other articles about family guarantee loans or get in touch with one of our experienced brokers.

Who can help me with Lender’s Mortgage Insurance?

If you don’t have a 20% deposit available for a home loan and you’re struggling to make sense of the alternatives, you’re not alone. With distrust in the financial sector at an all-time high, knowing where you want to put your money and who you can speak to about it can be nerve-wracking.

That’s where we come in.

As ex-Big 4 bankers, we’re experts in all things home loans. We’re familiar with all the options available to you without a 20% deposit and can help you determine your eligibility, prepare your application and communicate with banks until we find the right home loan for you. And we do it all for free.

For more information about the services we offer, continue reading our short and sweet articles and summary videos. You can also get in touch with us via our website for a real chat with a real person about all things home loans.

Disclaimer: The information provided is general in nature and does not constitute financial advice. Please speak to us for recommendations on your individual circumstance and requirements.