Three ways to buy property when you can't save a big deposit


Property prices in Australia are once again surging upward. As prices rise, the amount required for a deposit rises too. This makes entering the market harder, even at a time when interest rates are so low.

Entering the property market is definitely a challenge. But there are ways to make it slightly easier, from taking advantage of government grants to having your parents act as guarantor or using a low deposit home loan.

If any one of these options is available to you, it could make all the difference and help you finally crack the property market.

three ways to buy property when you cant afford a deposit

1. Buy with a low deposit

A 20% deposit is considered the norm when buying property in Australia. But with property prices so high, it's just not realistic for many first home buyers.

Many lenders offer home loans to borrowers with a deposit of less than 20%. These low deposit home loans are often identical to other loans, except for one detail: the maximum insured loan-to-value ratio (LVR).

Don't let this technical mortgage term confuse you. The maximum insured LVR just means how much you can borrow and how big your deposit needs to be. Most home loans have a maximum LVR of 80%, meaning you can only borrow a maximum of 80% and you'll need a 20% deposit to get the loan.

But some home loans have a maximum insured LVR that goes higher than 80%. If a loan has a 90% LVR then you only need a 10% deposit. Some loans go even higher, allowing you to borrow 95% LVR with just a 5% deposit.

This means that you can save much less and crack the property market faster. If you wanted to buy a $500,000 property with a 20% deposit, you'd need to save up $100,000. But with a 5% deposit, that falls to just $25,000.

There are three things to be aware of when buying with a smaller deposit:

Lenders mortgage insurance premiums

When your deposit is smaller than 20%, your lender will charge you lenders mortgage insurance (LMI) on top. This protects the lender in case you can't repay the loan. It can add thousands of dollars to the cost of your loan.

A smaller deposit means borrowing more

Buying with a low deposit raises your loan amount. This means your repayments will be larger, as you've borrowed more. It's the price you pay for getting into the market faster.

Lenders will scrutinise your application more closely

Low deposit borrowers may have to work harder to show that they can repay the loan. Lenders will examine your income and spending very closely when you apply for a loan. Depending on the lender, your postcode and property type, you may have a harder time getting a loan too. Some lenders won't lend you 90% or more if you're buying an apartment, for example.

2. Get a guarantor

If your parents own property then they may be able to help you without paying anything. If they agree to act as a home loan guarantor, your parents will effectively promise to pay back part of the home loan if you can't. This means putting their property up as security for your loan.

This sounds risky, and it could be! But if you are confident you can make your repayments and your parents are willing, it is an option. They don't even have to guarantee the entire loan amount.

You could save a 5% deposit and borrow 95% and have your parents guarantee 15%. This lets you avoid lenders' mortgage insurance. And your parents don't have to cover the entire loan if you default. Once you've repaid that 15%, the rest is all on you.

The guarantor option isn't for every home buyer. It requires having parents who are financially comfortable to some degree. And you also need to consider if it's worth the possible risk of entangling your finances with your parents in such a complex way.

3. Take advantage of government support

As a first home buyer you may be eligible for multiple state/territory and federal government grants or policies. And in many cases you can be eligible for more than one.

The First Home Loan Deposit Scheme allows a small number of first home buyers to buy or build a new home with a 5% deposit. The government acts as a guarantor, allowing you to avoid LMI costs without involving family members.

If you qualify for a first home owner grant in your state, you might be able to get around $10,000, which you can add towards your deposit. Every state and territory has different grant sizes and eligibility requirements, so do your research there.

You may also qualify for a stamp duty exemption or discount. While this isn't extra money, it can save you thousands of dollars in stamp duty costs when you buy. This is one of the biggest property buying expenses outside of the deposit itself.

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Richard Whitten is a senior writer at Finder covering home loans and property. Richard trained as a high school English teacher and has edited textbooks and taught English to office workers in South Korea. He has a Bachelor of Education and a Graduate Certificate in Communication.
Warren Gibson
June 2, 2021 5.54pm

A fourth option is the fractional model which enables anyone with $1000 or more to buy an interest and apply to be the tenant. They pay rent instead of a mortgage and can buy units from their co-investors at the prevailing value over time gradually accumulating equity. With a small loan they can buy more at the outset. The other investors may be random people or family and friends. Even super contributions can be used to buy units, but there are restrictions.