How to buy a house without a 20% deposit

Saving for a deposit and affordability are the two biggest hurdles facing most first-time home buyers face.

High prices and the increased cost of living, sparked by inflationary pressures, is making it increasingly difficult to achieve the 20% deposit, plus associated purchase costs, normally required by lenders, according to the lenders mortgage insurance provider Helia (formerly Genworth).

"The proportion of first home buyers who are proposing purchasing their property with a 20% deposit has halved since 2019, indicating that it is no longer realistic for this group to buy a property with the 20% deposit typically required by most lenders," it says.

The median house price in the combined capitals hit a record $1.113 million in the March quarter of 2024, according to Domain. In Sydney it was $1.6 million and in Melbourne it was just over $1 million.

But first home buyers shouldn't give up. There are strategies you can employ to help you into your own home sooner. Here are five of them:

1. Get family help

Australians are lending an average of about  $100,000 to their children to help them to compete in the housing market, although it varies depending on location, according to financial analyst Martin North.

Even if your parents or other relatives can't give you money, they may agree to guarantee part of your loan, which means they don't have to stump up any cash as long as you meet your repayment obligations.

Essentially, your parents (or another relative) use their own property to boost your borrowing power by guaranteeing all or a portion of your loan, for example 20%. This enables the kids to meet the 20% deposit required to avoid expensive lenders mortgage insurance (LMI) and tap into better mortgage rates.

2. Buy a tiny home

If you are a minimalist, a tiny home may appeal. The big plus is the much lower cost, from as little as $30,000 for a basic model.

But there are obstacles to buying a tiny home that you will need to overcome, because most of them are on wheels.

The Australian Tiny House Association website, tinyhouse.org.au, provides lots of information to help you. Permanent tiny homes intended for long-term living will need council approval, says president Janine Strachan. In most jurisdictions this will be challenging, she says.

Finding a parking spot for your home can be difficult. If you have family with some backyard space, this could prove a great help, otherwise you may have to rent land. Even though your tiny home is going to be your permanent home, a mortgage is not an option because tiny houses are classified as "caravans" in Australia.

You can apply for a caravan loan, which is similar to a car loan, or a secure personal loan. An unsecured personal loan is also an option but usually carries a higher interest rate. (See ratecity.com.au for current rates on both secured and unsecured loans).

Tiny house companies and finance companies are starting to work together to make it easier for their customers to get loans. Of course, this may come with a higher interest rate, so do your research to make sure you are getting the best rate possible.

3. Buy with a friend

Co-buying can certainly boost your purchasing power, but it's riddled with pitfalls, so it's essential to have a formal co-ownership agreement.

It's likely you will opt for a tenants in common structure, where each person owns a specific share of the property separately and each is free to sell or otherwise deal with their interest in the property at any time provided that there are no terms in the co-ownership agreement stating otherwise.

But even with this structure, and separate borrowings to buy the home, it's likely that your lender will require each owner to be jointly liable for the total loan.

This means if your co-buyer(s) can't afford their repayments for some reason, the lender will expect you to meet the shortfall. Even with a property share loan, this is usually the case.

Your co-ownership agreement should cover:
• What happens when one party wants to exit the arrangement.
• An agreed time for keeping the property.
• A plan for maintenance costs.
• A mediation or dispute resolution clause - this is especially important if you want to maintain your friendship with your co-owner(s).
• The divvying up of ongoing costs.

4. Tap into the First Home Loan Deposit Scheme (FHLDS)

This allows first-time buyers with at least a 5% deposit to avoid having to pay LMI when taking out a home loan. Instead, the federal government will act as the guarantor for the remaining deposit amount.

To be eligible you must be a genuine first home buyer and earn no more than $125,000 as a single person or $200,000 as a couple.

There are caps on the price you can pay for your property, depending on its location.

For details and how to apply see nhfic.gov.au.

5. Lower your expectations

Very few of us can afford to buy our dream home in our ideal location first up.

One positive of COVID-19 is that it has increased many people's ability to work from home, at least part of the time, which means travel times to work can be less of a consideration.

For some it may mean you can buy in a regional area, where prices are usually considerably lower and the lifestyle better.

Ways to lower your purchase price include: 
• Look for suburbs where prices have not risen as much as their neighbouring areas over the past few years.
• Choose a less-than-ideal home that you can improve over time, especially if you have the ability to do some of the work yourself.
• Consider apartments, which are often a cheaper alternative.

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