Top tips to buy your first townhouse with less deposit

Townhouses let you enter the property market sooner, but the loan structure needs to match the property type.

Most first home buyers looking at townhouses in suburbs like Brighton, Hampton, Sandringham, or Mentone assume they need a 20% deposit to avoid Lenders Mortgage Insurance. That assumption costs months of extra saving and sometimes means missing the property altogether. The First Home Guarantee, expanded from October last year, removes the LMI barrier if you have at least 5% deposit and meet eligibility criteria. You can purchase with a 5% deposit, no income cap, and no LMI on properties valued up to $800,000.

A townhouse is often the right middle ground for first home buyers who want more space than an apartment but cannot stretch to a freestanding house at current median prices. In Bayside areas, a two-bedroom townhouse might sit around $650,000 to $750,000, compared to well over a million for an equivalent house. That difference matters when you are relying on a low deposit option and trying to keep repayments manageable on a single or dual income.

The structure of your home loan application matters just as much as the deposit. Lenders assess townhouses differently to apartments because of strata involvement and land component. Some lenders cap loan-to-value ratios or exclude certain strata types from low deposit schemes. Knowing which lenders accept townhouses under the First Home Guarantee, and which offer genuine offset accounts or split rate options, shapes both your borrowing capacity and your repayment flexibility over the next few years.

How the First Home Guarantee applies to townhouse purchases

The First Home Guarantee allows eligible first home buyers to purchase with a 5% deposit without paying LMI, provided the property is valued under the regional or metropolitan cap. For metropolitan Melbourne, the cap is $800,000. Most two and three-bedroom townhouses in the Bayside area fall under that threshold.

Consider a buyer purchasing a townhouse in Mentone for $680,000. With a 5% deposit, they need $34,000 in genuine savings. Under the First Home Guarantee, the federal government guarantees the difference between the buyer's deposit and 20%, which removes the LMI cost that would otherwise add around $25,000 to $30,000 to the upfront expense. The buyer still needs to demonstrate savings capacity, stable income, and meet the lender's serviceability test, but the barrier to entry drops significantly.

The scheme has no income cap, which means it is accessible to dual-income households earning above the thresholds that previously excluded them from similar programs. The property must be your primary residence, you cannot have owned property before, and the purchase price must fall under the metropolitan or regional cap depending on location.

Stamp duty concessions in Victoria reduce upfront costs further

Victoria offers a full stamp duty exemption on properties valued up to $600,000 for eligible first home buyers, and a reduced rate up to $750,000. On a $680,000 townhouse, the stamp duty saving sits around $35,000, which is often more valuable than a cash grant because it directly reduces the amount you need at settlement.

The concession applies to both established and new townhouses, provided you meet the eligibility criteria. You must be a natural person, at least one purchaser must be an Australian citizen or permanent resident, and you must move in within 12 months and occupy the property as your principal place of residence for at least 12 months.

The Victorian First Home Owner Grant of $10,000 applies only to new homes valued up to $750,000. A new townhouse in an off-the-plan development qualifies, but an established townhouse purchased from a previous owner does not. If you are weighing up a newly built townhouse versus an established one, factor in whether the extra $10,000 grant offsets the price premium on new stock in your target suburb.

Why offset accounts and split rates matter for townhouse buyers

An offset account linked to your home loan reduces the interest charged by offsetting your savings balance against the loan principal. If you have a $646,000 loan and $20,000 sitting in a linked offset account, you only pay interest on $626,000. That difference compounds over time and gives you flexibility to park savings, income, or windfall payments without locking them into the loan permanently.

Not all lenders offer full offset accounts on low deposit home loans, and some charge a higher interest rate for the privilege. When comparing lenders, check whether the offset is full or partial, whether there is an annual fee, and whether the account is linked to a variable or fixed interest rate. A fixed interest rate generally does not allow an offset, though some lenders offer a split structure where part of the loan is fixed and part remains variable with an offset attached.

A split rate structure lets you lock in a portion of your loan at a fixed interest rate for certainty, while keeping the remainder on a variable rate with access to an offset and the ability to make extra repayments without penalty. In our experience, first home buyers purchasing townhouses in the Bayside area often split 50% to 70% fixed and leave the rest variable, giving them stability on repayments while retaining flexibility as their income grows or savings accumulate.

Strata involvement and how lenders assess townhouses

Lenders treat townhouses as a hybrid between houses and apartments. Most townhouses sit on a strata title, which means you own the building and a share of the common property, but the land is divided among all owners in the complex. That structure introduces body corporate fees, strata by-laws, and shared responsibility for maintenance, all of which a lender considers during the home loan application.

Some lenders apply a higher interest rate or lower maximum loan-to-value ratio on strata properties, particularly if the complex has fewer than six dwellings or includes commercial tenancies. Others exclude certain strata types from the First Home Guarantee altogether. When you apply for pre-approval, the lender will request a copy of the strata report and body corporate financial statements to assess whether the complex is well managed and financially sound.

In a scenario like this: a buyer finds a three-bedroom townhouse in Hampton listed at $720,000. The property is part of a small complex with four dwellings, no sinking fund issues, and quarterly body corporate fees of around $1,200 per year. The buyer applies through a lender that accepts small strata complexes under the First Home Guarantee and receives approval at a 95% loan-to-value ratio with a variable interest rate and offset account. Settlement proceeds without issue, and the buyer moves in within eight weeks of the offer being accepted.

What to expect during the home loan application process

Pre-approval gives you a conditional commitment from a lender before you make an offer on a property. It confirms your borrowing capacity, clarifies your budget, and speeds up settlement once your offer is accepted. Most lenders issue pre-approval within a few days if your documentation is complete, and it remains valid for three to six months depending on the lender.

You will need proof of savings, payslips covering at least three months, tax returns if self-employed, and identification documents. The lender will also request a copy of the contract of sale and strata report once you have made an offer. If you are relying on a gifted deposit from a family member, the lender will require a signed declaration confirming the funds are a genuine gift and not a loan.

The First Home Super Saver Scheme allows you to contribute up to $15,000 per year into your superannuation fund and withdraw up to $50,000 in total to use as a deposit. Contributions are taxed at 15% rather than your marginal rate, which makes it a useful way to build savings faster if you start planning a year or two before purchasing. The withdrawal process takes several weeks, so factor that into your settlement timeline if you plan to use it.

Weighing up new versus established townhouses in Bayside suburbs

New townhouses in areas like Mentone, Parkdale, or Highett often come with a price premium compared to established stock, but they qualify for the $10,000 Victorian First Home Owner Grant and typically have lower maintenance costs in the first few years. Established townhouses may offer better value per square metre and more choice in location, but you miss out on the grant and may face higher body corporate fees if the complex is older.

An established two-bedroom townhouse close to Mentone station might be priced around $650,000, while a comparable new townhouse in a small development could be listed at $700,000. The $50,000 difference is partly offset by the $10,000 grant, lower immediate maintenance, and potentially lower body corporate fees in a newer complex. The calculation shifts depending on your priorities around location, transport access, and whether you value the ability to renovate or personalise an older property.

Most lenders treat new and established townhouses the same for loan assessment purposes, provided the strata documentation is sound. The main difference in your home loan options will come down to whether the property falls under the $800,000 First Home Guarantee cap and whether you can demonstrate the savings and income required to service the loan.

Call one of our team or book an appointment at a time that works for you

If you are ready to move forward with purchasing a townhouse or want to understand your borrowing capacity and deposit options in detail, reach out to Mortgage Broker Bayside. We work with first home buyers across the south-eastern suburbs and can structure your home loan application to match the property type, your income, and your timeline. Call one of our team or book an appointment at a time that works for you.

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