Many home buyers assume they’ll need a 20% deposit before they can apply for a home loan, but that’s not necessarily true. Features such as lenders mortgage insurance (LMI) and family guarantees mean that some lenders may let you buy your home with a much smaller deposit than you might think.

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See if your eligible to purchase your first home with a deposit of as little as 5% with the first home loan deposit scheme. Todd and Renima’s masterplan. Let’s revisit Todd and Renima’s situation. If they opt for a cheaper house, say $400,000, this cuts their required deposit. Our home loans have lower entry costs, with our low deposit requirement and no lender's mortgage insurance, so you can get into your own home sooner. If you're ready to apply, follow the steps to how much you can borrow and see if you qualify. The bigger your deposit, the smaller your loan will be and the less interest you’ll have to pay. Ideally, you should save as much as possible before buying a home. The minimum required deposit is 10%, but.

What is the First Home Loan Deposit Scheme? The First Home Loan Deposit Scheme began on 1 January 2020. It allows eligible first home buyers to purchase a property with as little as a five per cent deposit and without the need to take out lenders mortgage insurance (LMI). A further 10,000 places were announced in October 2020 as part of the First Home Loan Deposit Scheme (New Homes), aimed at supporting customers looking to buy or build a new home. Established properties are not an acceptable property type for the First Home Loan Deposit Scheme (New Homes).

The myth about the 20% deposit for a house

When it comes to saving for a home deposit, you’ll often hear people bring up a minimum figure of 20%. In other words, if the purchase price of your home is $500,000, many people will tell you that you need to have a deposit of $100,000 saved before you can apply for a loan and purchase your home. But that’s not always the case.

While it’s correct that most lenders generally like to limit their exposure to a loan-to-value ratio (LVR) of 80% – which means that they’d expect you to pay 20% of the purchase price of the property – in some cases you may still be able to satisfy a lender’s risk criteria, even without having saved 20% of the purchase price.

What if you don’t have a 20% home loan deposit?

One way a lender may let you overcome a small deposit is by giving you the option of paying for lenders mortgage insurance (LMI). LMI is insurance that protects the lender if you can’t meet your mortgage repayments and default on your loan.

With LMI, a lender will sometimes let you take out a home loan if you have as little as 5% of the home’s value if you’re an owner-occupier, or 10% if you’re an investor. That way, for the same $500,000 property, you could need as little as a $25,000 deposit if you’re buying your own home or $50,000 if you’re an investor.

That said, if you do use the option of paying LMI, you will bear its cost – not the lender. That means your home loan will be more expensive too. You can read more about how lenders mortgage insurance works here.

Another alternative: family guarantee

Another option some lenders offer to home buyers is the chance to use a family guarantee. A family guarantee allows a close family member such as a parent, grandparent or sibling, to use the equity in their home to provide additional security for your loan, thereby giving the lender extra protection.

Unlike a full guarantee, a family guarantee usually only requires a guarantor to provide security until a particular threshold is reached. For instance, if you have a five percent deposit, your lender may allow you to use a family guarantee to provide 20% security so that the equity in the guarantor’s home provides the remaining 15%.

Once you’ve paid down enough of your loan to reach this threshold – or even if the market rises enough so that your LVR is now only 80% – you can usually have the family guarantee released.

The benefits and disadvantages of a family guarantee

Because it offers additional security, a family guarantee may allow you to borrow more than you otherwise could. You may also be able to reduce the amount of LMI you need to pay, or possibly avoid it altogether. However, your lender will still want to make sure that you can meet your repayments and will assess your capacity to repay any loan.

If you do choose this path and you have a family member willing to help you out, they should always be careful to get their own independent financial and legal advice before signing anything. After all, if you default on your home loan the lender may ask them to provide the guaranteed portion of your loan.

Other upfront costs you shouldn’t forget

While your home deposit may be the largest cost you’ll need to pay when you buy a home, there are some other upfront costs you’ll need to cover also. These can include stamp duty, pest and building inspections, legal or conveyancing fees, removalists costs and more.

Of these, it is stamp duty that usually represents the largest cost. Although, in many States and Territories, you may be entitled to a stamp duty discount if you’re a first home buyer.

Generally, you won’t be able to borrow for the cost of these expenses and you will have to meet them out of your own pocket. You will also usually have to pay most of them at, or around, the time your property settles. That means you should always budget for saving for these, as well as any deposit.

When it makes sense to buy a home with a small deposit

Finally, while a bigger deposit usually ensures you need to borrow less, it’s always worth remembering that there are times it may make sense to purchase a home with a smaller deposit. This could include where saving a large deposit isn’t realistic, or where the market is rapidly rising and saving for a larger deposit could cost you extra money and mean you need to save even more.

Income test

The Scheme includes an income test for:

• singles – your taxable income for the previous financial year must not be more than $125,000.
• couples – your combined taxable income for the previous financial year must not be more than $200,000.

The income test is assessed by your lender.

For Scheme reservations made up to 30 June 2020, the relevant Notice of Assessment (NOA) from the Australian Taxation Office is for the 2018-19 income year. However, if you hold that reservation for too long (e.g. more than 90 days), your relevant NOA may end up being the 2019-20 income year.

For Scheme reservations made from 1 July 2020 to 30 June 2021, the relevant NOA is the 2019-20 income year.

Prior ownership test

The Scheme is in place to assist genuine first home buyers.

The prior ownership test requires you to not have ever owned:

• a freehold interest in real property in Australia
• an interest in a lease of land in Australia with a term of 50 years (or more), or
• a company title interest in land in Australia.

These tests apply for property interests in all states and territories of Australia, regardless of whether the property was a commercial property, an investment or owner-occupied, and whether it was ever lived in.

They also apply if any of the interests listed above have been held by you on your own or together with someone else – for example, where you held an interest in property with a former spouse or de facto partner.

Note that if either of you – whether individually or with someone else – have held any of the interests listed above, as a couple you are not eligible first home buyers.

For your home loan to be covered by the Scheme, you will need to make a statutory declaration that confirms you have not held any interests of this kind. This declaration is made under the First Home Buyer Declaration provided to you by your participating lender.

If you are unsure of whether you have held any of the interests listed above you should ask a professional adviser, as you will need to be sure that you are not giving a false declaration.

Citizenship test

The Scheme is only open to current Australian citizens.

The citizenship test for you being an ‘eligible first home buyer’ for the Scheme is that you will need to be an Australian citizen at the time you enter into a home loan with your participating lender.

If you are applying under the Scheme as part of a couple, you will both need to be Australian citizens.

The Scheme is not open for permanent residents who are not Australian citizens.

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Minimum age

The Scheme is only open to persons that are 18 years of age or over.

The minimum age test requires you to be 18 years of age or over at the time you enter into a home loan with your participating lender.

Deposit requirement

There is a minimum deposit requirement for the Scheme.

Hdfc Home Loan Deposits

The Scheme is to assist singles and couples (together) who have at least five per cent (5%) of the value of an eligible property saved as a deposit. The 5% must be made up of genuine savings. If you have 20% or more saved, then your home loan will not be covered by the Scheme.

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Your Participating Lender will be able to tell you if you satisfy this requirement. You should also confirm with your Participating Lender whether any cash grants under other Australian Government, State or Territory schemes or programs you may receive can be considered as part of
genuine savings by that Participating Lender.

Owner occupier requirement

The Scheme is provided to assist Australians to purchase their first home.

Investment properties are not supported by the Scheme.

To meet the owner-occupier requirement, you will need to:

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• move into the property within six months from the date of settlement or, if later, the date an occupancy certificate is issued, and
• continue to live in that property for so long as your home loan has a guarantee under the Scheme.

If you don’t live in your property – including where you move out of the property at a later time – your home loan will cease to be guaranteed by the Scheme*. In these circumstances there may be terms and conditions of your home loan that require you to take certain actions – including that you may be need to pay fees and charges and/or take out insurance that would not have otherwise applied if your home loan were participating under the Scheme.

Your participating lender will be able to explain these terms and conditions to you.

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* Members of the Australian Defence Force (ADF) are still required to be owner-occupiers under FHLDS however if they are unable to meet the owner-occupier requirement because of their duties, they can still be eligible if, at the time of entering into their loan agreement, they intend to live in the property.