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What property value will my deposit get me

01 April 2021
What property value will my deposit get me

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Home ownership is a dream for many in Australia, and with home loan rates at record lows, many are jumping into the market. However, the question on everyone’s lips is how much do you save?

Typically, the minimum amount you’d need to save with is around 10%. When you see a ‘loan-to-value ratio' or ‘LVR’ of 90%, this is what it means. If it’s 90%, you need a minimum 10% deposit, and if it’s 80% you need a minimum of 20% deposit and so on.

Research from Domain indicates in Sydney it takes up to six-and-a-half years for a first home buyer to save for a 20% deposit on a ‘starter’ home, which the property group considers to be $680,000 in value. This is a whole two months longer than a year ago. Domain found that in no capital city in Australia does it take less than three years to save for a 20% house deposit. This has given rise to 'FOMO’, or fear of missing out. Borrowers can be forgiven for having FOMO, as in 2020, house prices rose 3.6% in a year when many experts predicted price falls of 10%, 20% or even 30%.

It’s tempting to ask for a home loan with the lowest deposit requirements to get your foot in the door sooner, however that comes with some downsides, which we’ll explain later.

How much of a deposit do I need to save for a home loan?

According to the Australian Bureau of Statistics, the mean home price at the end of 2020 was $728,500. Using this ‘average’, the deposit requirement breakdown is as follows:

LVR

Deposit

90%

10% Deposit: $72,850

80%

20% Deposit: $145,700

70%

30% Deposit: $218,550

Lenders Mortgage Insurance - LMI Explained

Typically, the borrower pays what’s called ‘lenders mortgage insurance’ - or LMI for short - if their deposit is smaller than 20%. Like car insurance covers you in case of a crash, the borrower pays for LMI in case they default on their mortgage.

  • The two largest LMI providers in Australia are QBE and Genworth.

LMI covers the lender, as they assume a borrower with a smaller deposit is a riskier customer than a borrower with a greater one. So, while with a smaller deposit you could save up quicker for a deposit, you’ll also have to consider the additional cost of LMI, which is often nothing to sneeze at.

How much is LMI?

LMI provider Genworth - which is one of loans.com.au’s LMI providers - has a handy LMI calculator on its website.

It indicates that based on the ABS average property price of $728,500 as mentioned above, a borrower with a 10% deposit would pay an upfront $16,128.99 in LMI, or approximately 2.2% of the property’s value.

In comparison, with a 15% deposit - or 85% LVR - the LMI premium would be approximately $8,853, or 1.2% of the property’s value.

This rate is for first home buyers/owner occupiers who have purchased the property to live in over a 30-year loan term.

For the price of a new small car in some cases, LMI is often not a cheap insurance policy. However, you will have to weigh that up with the potential benefits and other drawbacks of other deposit sizes, as explained below.

Pros and Cons of Your Deposit Size

Pros of Smaller Deposits

  • Less time taken to build deposit.

  • Get into market ‘sooner’, if anticipating house price rises, however past performance is not an indicator of future performance.

Cons of Smaller Deposits

  • LMI is often charged on deposits smaller than 20%, which can amount to 2-4% of the property price.

  • Some lenders charge higher interest rates for high LVR loans.

Pros of Larger Deposits

  • No LMI to be paid, potentially saving thousands of dollars, or around 2-4% extra in insurance premiums.

  • Less interest paid overall, potentially saving thousands over the life of the loan, as above.

Cons of Larger Deposits

  • Takes longer to save for, and in that time, property prices could rise further.

  • In the capital cities, it often takes in excess of five years to save for a ‘starter’ home deposit.

Overall, choosing how much of a deposit to save up for is a personal decision, and often comes down to patience, versus convenience, versus costs.

If you’re ready to take the property plunge, speak with one of our lending specialists today to find out how much of a deposit you need, as well as getting pre-approved for a home loan so you can go property hunting.

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