If you have less than 20% deposit, you are referred to (by the banks) as a Low Equity (or Deposit) Borrower. You are required to meet a different set of criteria to borrowers with 20% or more.
Note: this article has been updated to reflect the changes to the LVR rules. Information is current at 16th February 2021. Here’s an article on those LVR changes.
Understanding the requirements from the banks is confusing. We’ve come up with the most common questions to try to make it all easier.
The ideal deposit for any own-home purchase is 20% but typically, the minimum required is 10% for an existing property and in some rare cases 5% for a turn-key build. We are seeing examples where people can buy existing homes with less than 10% but they must earn a significant amount and have a very clean application - ie; no secondary debt (credit cards), good savings habits etc.
Note: your income needs to be very good for a 5% deposit but it is possible. You'll also need to explain why you haven't saved more on your good income (for example, you've been paying down debt).
The rules have changed and banks only have a certain amount of money they lend to low-deposit borrowers. Borrowers with less than 20% deposit will need to have a higher income than those with more deposit.
The short answer is, main banks are still lending to low equity borrowers and it's well worth talking to a mortgage broker to see if you meet the criteria.
The banks want to see that you are responsible with your money. If you have been renting and have not been able to save money, then are you likely to pay down your mortgage?
Most banks, therefore, require that you have saved at least 5% of the purchase price - often referred to as “genuine savings”. So if you are buying a $500,000 home, you would need to have saved $25,000 on your own. The rest of your deposit can be gifted by a parent.
Note: The First Home Grant can be used as a deposit but doesn’t count as part of the required “5% genuine savings”.
Yes, the money from your parents can be a loan. If there is interest to pay or regular payments to pay back the loan, this will be taken off your income so be careful around this. The terms and repayments for this loan will need to be clearly laid out for your mortgage application.
In summary, a 5% deposit is the minimum typically need for construction lending and only in rare cases. A 10% deposit is typically the minimum required for existing homes. Most banks don't allow a pre-approval for low deposit borrowers so you have to have a conditional offer accepted on a property before you can apply. This means you are going to want to look for "offer" type sales rather than auctions.
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