The deposit myth: why 20% is not the rule

What the 20% figure actually is

It is the loan-to-value ratio at which most lenders stop requiring lenders mortgage insurance.

Borrow 80% of a property’s value or less, and no LMI. Borrow more, and the lender requires an insurance policy — which protects the lender if the loan goes bad, and which you pay for.

That is the whole of it. It is not a legal requirement, not an eligibility test, and not a statement about whether you are ready to buy. It is a pricing threshold.

The confusion is understandable, because 20% is what everyone repeats. But treating it as a rule has a real cost: people spend years saving toward a number they may not need, in a market that does not stand still while they do it.

The five ways around it

1. Government guarantee schemes

Housing Australia administers schemes where the government guarantees part of the loan, letting eligible buyers purchase with a substantially smaller deposit and no LMI. There are variants targeted at first home buyers, single parents and regional buyers.

Eligibility criteria, property price caps and the number of available places are set federally and have changed more than once. Check the current position rather than what applied last year — this is the single most commonly out-of-date piece of advice people arrive with.

2. Occupation-based LMI waivers

A number of lenders waive LMI at higher loan-to-value ratios for particular occupations. Medical professionals have the widest access, but the lists extend considerably further — nurses, teachers, police, paramedics, accountants, lawyers and some engineering roles all appear on some lender’s list.

This is the most frequently missed option, because nobody tells you about it. If you work in one of those fields it costs nothing to check, and it can remove tens of thousands of dollars from what you need to save. See your profession.

3. A guarantor

A family member uses equity in their own property to cover the shortfall, which can eliminate LMI entirely.

It works, and it is a genuine commitment with genuine consequences for them. A guarantor is liable if things go wrong. It should be entered into with proper advice on both sides, and with a clear plan for releasing the guarantee once enough equity has built up.

4. Paying the LMI

Not a failure. A decision.

LMI is a real cost, and on a large loan it runs well into five figures. But the question is not “is this expensive” — it is “is this more expensive than waiting”. If the market you are buying into moves faster than you can save the difference, waiting costs more.

The honest position is that this depends on a market movement nobody can reliably predict. What can be said is that it deserves to be a considered calculation rather than an automatic refusal.

5. Buying somewhere the number is smaller

Twenty per cent of $600,000 is $120,000. Twenty per cent of $450,000 is $90,000. In Melbourne’s north the difference between suburbs — and between established and new build — is large enough that the deposit problem sometimes solves itself by widening the search.

Which of these five is open to you is a personal question. It depends on your job, your family situation and what you have saved. Book a free chat and we will work out which ones actually apply.

What the deposit is not the whole of

The deposit is only part of what you need at settlement. The rest catches people out:

• Stamp duty, usually the largest single additional cost. First home buyers in Victoria may be exempt or receive a concession depending on value — see the stamp duty calculator
• Conveyancing and legal fees
• Building and pest inspections
• Loan application, settlement and valuation fees, where they apply
• Council and water rate adjustments at settlement
• Moving costs, which are always more than budgeted

And if you are building rather than buying established, the exclusions from the build price — driveways, landscaping, fencing, window coverings, floor coverings — are usually funded from your own pocket rather than the construction loan.

Genuine savings

Many lenders want to see part of the deposit accumulated over time, commonly three months, rather than appearing suddenly. This is called genuine savings.

Gifts and inheritances are generally acceptable, but they are assessed differently, and some lenders require a statutory declaration confirming a gift is not repayable. If a family member is helping, say so early — it is entirely normal, and it is much easier to document upfront than to explain at assessment.

The question worth asking instead

Not “how much deposit do I need”, but:

“What does each option actually cost me over time?”

Saving another two years to avoid a $15,000 premium is a good decision if prices are flat. It is a poor one if the property you want appreciates by more than that in the meantime, or if you are paying rent throughout.

That is a calculation with real numbers in it, and it is worth doing properly before you commit years to a savings target you may not need to hit.