How much deposit do I need for a home loan?
While home ownership is a dream for many in Australia, it is a big financial investment. It’s easily one of the most expensive purchases we’ll ever make in our lives. Saving up for the house deposit alone is one of the biggest hurdles to getting into the property market.
So, the question on everyone’s lips is how much of a home loan deposit you actually need to save?
How much do you need for a house deposit?
In most cases, you’ll need at least 20% of the home’s purchase price as a deposit or an 80% loan-to-value ratio (LVR) when taking out a home loan. Some lenders, like loans.com.au, let borrowers provide as little as a 10% deposit or a 90% LVR when applying for a home loan.
If you put down a deposit lower than 20% of the property’s purchase price, you may have to pay for Lenders Mortgage Insurance (LMI) as lenders see those with smaller deposits as riskier. The LMI gives lenders extra protection if a borrower can’t make payments or defaults on their loan.
How does the deposit amount affect your home loan?
The size of your deposit plays a huge role in your home loan. It affects your chances of approval, the interest rates, and could limit the home loans you’re eligible for. Generally, a deposit of 20% or higher gives you a better chance of getting a good deal on your home loan.
The bigger your deposit is, the less money you borrow from the lender. A sizable deposit shows lenders you’re financially capable and reduces the risk for them.
Benefits of a low loan-to-value ratio (LVR)
Lenders prefer borrowers who are at low risk of defaulting. In addition to your credit score and financial history, they’ll be considering how much deposit you’ll be willing to provide. An LVR of less than 80% (or a home loan deposit of more than 20%) can put you in an advantageous position.
A high LVR gives lenders the sense that you’re likely to make your payments. This improves your likelihood of being approved for a loan. Not only that, but lenders may be more amenable to provide lower rates or offer loan features that can help lower the overall cost of your home loan.
Avoiding Lenders Mortgage Insurance (LMI)
If you can’t put down a 20% deposit, there may still be ways to avoid paying LMI. For example, first home buyers can apply for the First Home Owner Grant, which offers a cash boost of $10,000 to $30,000 towards their deposit depending on the relevant state/territory.
There is also the First Home Guarantee Scheme (FHBG), allowing first home buyers to purchase a home with a deposit as low as 5%, without the need to pay LMI. The federal government will provide the lender with a guarantee of up to 15% of the property's value. The FHBG exists alongside the Regional First Home Buyer Guarantee and the Family Home Guarantee.
Meanwhile, the Family Home Guarantee Scheme helps single parents with dependents build or buy a home with a deposit as low as 2% without needing to pay LMI.
How to decide on a home deposit amount
Affordability is the most important factor to consider when deciding on a deposit amount. Although it’s ideal to provide at least a 20% deposit, it might not may not always be possible.
Review your finances carefully when determining a deposit amount. You could also use an online borrowing capacity calculator to give you an idea of how much you could borrow with your current finances. Having a price range in mind can make it easier to decide on a deposit amount.
Ultimately, what matters most is ensuring that your deposit is in line with your financial capabilities. There are benefits to putting down a larger deposit, but only if you can comfortably afford it.
Less than 20% home loan deposit
Providing a smaller deposit does have certain advantages, like speeding up your home buying timeline. Since you’re only putting a small deposit, you don’t have to spend so much time saving. You can buy your home much sooner since you’re not waiting to build a deposit.
However, the downside to a lower deposit is paying LMI, which could be around 2% to 4% of the property price. Some lenders may also charge higher interest rates for high LVR loans.
More than 20% home loan deposit
If you put down a sizable home loan deposit, you don’t have to pay LMI, saving you thousands in insurance premiums. Borrowing less means you’ll also be paying less interest over the life of the loan. It could also mean lower monthly repayments, making the loan more manageable.
The drawback of providing a large deposit is that it could take a lot of time before you save enough money. In that time, property prices could rise further, meaning you may have to save longer before you can buy a home.
Tips for saving for a home deposit
Here are some tips that can help you save up for your home deposit:
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Start saving as early as possible – Save, save, and save some more. Putting money aside over a period of time shows lenders you know how to budget properly.
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Lower your expenses – Consider trimming your living expenses if they’re a little on the higher side, as it can affect your borrowing power. Examine your spending and see what’s worth spending and what isn’t.
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Set a budget and stick to it - Once you've decided on a home loan deposit amount, reviewed your finances, and figured out where you can cut back. It’s time to put pen to paper and finalise your budget and follow it diligently.
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Put your savings to work – You may want to consider storing your savings in a high-interest savings account or even consider utilising an asset class such as shares, to get the most out of your savings.
Overall, choosing how much deposit you put towards your home loan often comes down to patience, versus convenience, versus costs.
Looking for a low rate home loan?
Speak with one of our lending specialists today to find out how much of a home loan deposit you need. Call 13 10 90 or apply for a pre-approved home loan so you can start your house hunting as soon as possible!
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
