What deposit do you actually need for a home loan?
Most lenders require a deposit of at least 20% of the property's purchase price to avoid Lenders Mortgage Insurance, but you can apply for a home loan with as little as 5% in some cases. The amount you need depends on your loan to value ratio, the lender's policies, and whether you qualify for a government scheme or guarantor arrangement.
When lenders assess your deposit, they look at genuine savings held for at least three months, such as money in a savings account or offset account. Funds that appear suddenly or come from sources like a recent cash gift may not count as genuine savings unless they meet specific criteria. Understanding what counts and what doesn't can change your timeline significantly.
How Lenders Mortgage Insurance affects your deposit size
Lenders Mortgage Insurance is a one-off premium you pay when your deposit is less than 20% of the purchase price. The premium protects the lender if you default on the loan, and it increases as your deposit gets smaller. A borrower with a 10% deposit will pay more in LMI than someone with a 15% deposit, and the cost can run into thousands of dollars.
Consider a borrower purchasing an owner occupied home who has saved 12% of the purchase price. Their lender calculates an LMI premium that adds several thousand dollars to their upfront costs. They have two choices: add the LMI to the loan amount, which increases their repayments, or wait longer to save a larger deposit and avoid LMI entirely. Neither option is wrong, but the decision depends on whether they value entering the market sooner or minimising long-term costs.
Some lenders offer LMI waivers for specific professions such as medical practitioners or accountants, which can reduce the required deposit to as low as 10% without the insurance premium. If you work in an eligible occupation, this can save you both time and money.
Using a guarantor to reduce your deposit
A guarantor loan allows a family member, usually a parent, to use the equity in their property as additional security for your home loan. This can reduce your required deposit to as little as 5%, and in some cases eliminate the need for Lenders Mortgage Insurance altogether.
The guarantor doesn't hand over cash. Instead, they provide a limited guarantee over a portion of your loan, which reduces the lender's risk. Once you build enough equity through repayments or property value growth, the guarantee can be removed. In our experience, this arrangement works when both parties understand the obligation and have a clear plan for releasing the guarantee within a few years.
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Government schemes that lower deposit barriers
Victoria offers several government-backed programs designed to help buyers enter the market with smaller deposits. The First Home Guarantee allows eligible first home buyers to purchase with a deposit as low as 5% without paying Lenders Mortgage Insurance. The scheme is income-tested and applies to properties below a certain price cap, which varies by location.
The Regional First Home Buyer Guarantee extends similar benefits to buyers purchasing in regional areas, with higher income and price thresholds than the metro equivalent. If you're considering a move outside Melbourne, this scheme can make a significant difference to your upfront costs.
These programs have annual caps on the number of places available, so timing matters. Applying early in the financial year increases your chances of securing a spot before allocations run out.
What counts as genuine savings and what doesn't
Genuine savings refers to money you've saved over time and held in your own account for at least three months. Term deposits, regular savings accounts, and shares all qualify. A tax refund, sale of assets like a car, or a recent gift from family generally won't count unless the lender makes an exception.
If your deposit includes funds that don't meet the genuine savings test, some lenders will still consider your application but may require a larger overall deposit or charge a higher interest rate. Others won't lend at all if genuine savings fall below their minimum threshold, which is typically 5% of the purchase price.
One scenario we regularly see involves a buyer who has saved diligently but receives a financial gift from a parent just before applying. The gift pushes their total deposit above 10%, but the lender still requires at least 5% to have been saved independently. Knowing this requirement in advance prevents delays during the home loan application process.
How offset accounts help you build equity faster
An offset account is a transaction account linked to your home loan. The balance in the offset reduces the loan amount on which you pay interest, which means more of each repayment goes toward the principal. Over time, this helps you build equity faster and can improve your borrowing capacity if you decide to refinance or purchase another property.
For someone starting with a smaller deposit and paying LMI, an offset account becomes even more valuable. Directing your salary and savings into the offset reduces the interest charged each month, and you reach the 20% equity threshold sooner. Once you cross that line, you can refinance to remove the LMI component from your loan if it was capitalised, or simply enjoy the lower loan to value ratio when negotiating your next rate discount.
Not every home loan product includes an offset account, and some lenders charge extra for the feature. When comparing rates, factor in whether the offset functionality will save you more in interest than it costs in fees.
Choosing between variable rate and fixed rate with a smaller deposit
When your deposit is below 20%, the choice between a variable rate and fixed rate can affect both your upfront costs and your flexibility. A variable interest rate gives you access to features like an offset account and allows you to make extra repayments without penalty, which helps you build equity and reach the 20% threshold faster.
A fixed interest rate locks in your repayments for a set period, which provides certainty but often restricts extra repayments and doesn't allow for a linked offset. If your priority is reducing your loan to value ratio quickly, a variable rate usually serves that goal more effectively.
Some borrowers use a split loan, where part of the loan is fixed and part is variable. This gives you rate certainty on a portion of your debt while maintaining flexibility on the rest. It's a middle ground that works when you want predictable repayments but don't want to lose access to features that help you build equity.
Call one of our team or book an appointment at a time that works for you. We'll assess your situation, explain which lenders offer the lowest LMI premiums for your deposit level, and help you structure a loan that gets you into your home without unnecessary costs.
Frequently Asked Questions
What is the minimum deposit required for a home loan in Australia?
You can apply for a home loan with as little as 5% deposit in some cases, but most lenders require at least 20% to avoid Lenders Mortgage Insurance. The exact amount depends on your loan to value ratio, the lender's policies, and whether you qualify for a government scheme or guarantor arrangement.
How does a guarantor help reduce my deposit requirement?
A guarantor uses the equity in their own property as additional security for your home loan, which can reduce your required deposit to as low as 5%. This arrangement can also eliminate the need for Lenders Mortgage Insurance, and the guarantee can be removed once you build enough equity through repayments or property value growth.
What counts as genuine savings for a home loan application?
Genuine savings refers to money you've saved over time and held in your own account for at least three months, such as funds in a savings account, term deposit, or shares. Recent gifts, tax refunds, or proceeds from asset sales generally don't count unless the lender makes an exception.
Can I avoid Lenders Mortgage Insurance with a deposit under 20%?
Yes, you can avoid LMI with a smaller deposit by using a guarantor loan or qualifying for a government scheme like the First Home Guarantee. Some lenders also offer LMI waivers for specific professions such as medical practitioners or accountants, which can reduce the deposit requirement to as low as 10% without the insurance premium.
Should I choose a variable or fixed rate if my deposit is below 20%?
A variable rate usually helps you build equity faster because it allows extra repayments and access to an offset account, which reduces the interest you pay. A fixed rate provides certainty but often restricts these features, so your choice depends on whether you prioritise flexibility or predictable repayments.
