Pros and cons of buying a home with less than a 20% deposit

Saving a full 20% deposit towards a home can be tough. If you’re struggling to hit that 20% target, it doesn’t necessarily mean you can’t buy a house. While some lenders will let you take out a home loan with less than a 20% deposit, there are pros and cons that come with low-deposit home loans.

What is the minimum deposit for a home loan?

So, how much deposit is needed for a home loan? Most banks and lenders like to see a minimum deposit of at least 20% when you apply for a mortgage. However, if you don’t have the full 20% deposit, some banks and lenders will let you borrow with a smaller deposit but you’ll have to take out lenders mortgage insurance (LMI) or a low deposit premium (LDP). This can add thousands on top of your home loan, which means it’ll take you longer to pay off. 

While LMI and LDP can be costly, buying a home with a deposit of less than 20% comes with its own set of advantages that are worth considering if you’re trying to get into the property market. Here’s a breakdown of the pros and cons of buying a home with a small deposit.

Advantages of buying a home with a small deposit

While saving a 20% deposit might seem like a good idea to try and avoid paying for LMI or an LDP, depending on the market you could be better off getting in early with a smaller deposit. 

Here are some of the benefits of buying a home with a deposit of less than 20%:

• Quicker entry into the property market: Saving up a 20% deposit isn’t easy. It takes time and dedication. According to recent research by Domain, the average time it takes for an Australian couple aged 25-34 to save a 20% deposit required for an entry-level house is four years and nine months. In areas with high property prices, like Sydney and Canberra, it takes even longer. By paying for LMI or an LDP with a smaller deposit, you can enter the market sooner rather than waiting to save a larger sum.

• Opportunity to invest sooner: Property can be a valuable investment, which is why it’s such a popular choice for investors. Getting into the market earlier allows you to start building equity and potentially benefit from property appreciation over time.

• Potential for higher returns: If property prices rise, the value of your home could increase, providing you with capital gains. Depending on how much your property value grows, it could potentially outweigh the additional costs that come with a smaller deposit, like LMI or an LDP.

• Flexibility with savings: By not tying up all your savings in a home deposit, you could find you have more flexibility to manage unexpected expenses, invest in other opportunities or maintain a financial buffer. 

• Take advantage of low interest rates: If interest rates are low, the cost of borrowing may be a little more affordable, even with a smaller deposit. This can make homeownership more accessible for you as a potential borrower.

• Start growing your equity: As you start making mortgage repayments, the equity in your property will slowly start to grow. During this time, the value of your property might increase, leaving you with more home equity that you can use in the future. 

• Stop paying rent: The sooner you enter into the property market the sooner you can stop paying rent. Rather than your rent money ending up in someone else’s pocket, you can put that cash towards your home loan repayments.

Disadvantages of buying a home with a small deposit

Just because buying a home with a small deposit can offer some benefits, it’s not to say it doesn’t come some drawbacks too.

• LMI or LDP costs: When you borrow more than 80% of the property's value, lenders typically require you to pay LMI or an LDP. These expenses are designed to protect the lender in case you default on the loan. Both LMI and an LDP can add a significant upfront cost to your mortgage.

• Higher interest rates: In some cases, lenders charge higher interest rates for loans with smaller deposits. This is because they perceive these loans as riskier due to the higher loan to value ratio (LVR), so a higher interest rate is another way they’re able to offset the additional risk. 

• Bigger loan repayments: With a smaller deposit, you'll need to borrow a larger amount, resulting in higher monthly mortgage repayments. This can strain your budget and limit your ability to save or invest in other areas.

• Limited loan options: Some lenders may have stricter eligibility criteria or offer less favourable terms for loans with smaller deposits. This can limit your choice of lenders and loan products.

• Risk of financial strain: With a higher LVR, you have less equity in your home as a buffer against any financial shocks such as job loss or unexpected expenses. This can increase your vulnerability to financial stress.

• Difficulty refinancing: When you take out a home loan with a lower deposit, it can take you longer to build up 20% equity. If you’d like to refinance your home loan and have not built up enough equity, you could be charged with another round of LMI or an LDP if you move to a different lender. So you could get stuck in a home loan that doesn’t necessarily suit your needs until you build up enough equity to move elsewhere. 

Just because you haven’t quite saved up enough for a 20% deposit on your future home doesn’t mean you're out of the race completely. While some lenders will allow you to borrow with a low deposit provided you cover LMI or an LDP, they aren’t your only options. From guarantor loans to government subsidies and grants, check out our article on 5 things to consider if you don’t have a 20% deposit to learn more.

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.