How much you have for a deposit is a vital part of the loan decision process. Find out the amount you might need right here with Savvy.
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If you’re considering purchasing a property either to live in or for an investment, you’ll almost certainly need to apply for a home loan. Before you can apply, though, you’ll need to come up with a sizeable deposit to contribute to the agreed value of the house. But how large a deposit will you actually need to buy a house?
Read about all aspects of home loan deposits right here with Savvy, including loan-to-value ratios (LVR) and how Lenders Mortgage Insurance (LMI) can help you buy a home with a smaller deposit. You can find lenders offering loans with smaller or even no deposit required if you’re struggling to save up for your first deposit by comparing offers here.
Most lenders require 20% of your property’s value as a deposit. This means you can usually borrow 80% of the property’s agreed value, described as 80% LVR. A 20% deposit is regarded as a sensible, manageable total for borrowers to contribute to the cost of their home.
It’s always best to save up as much as possible for your home deposit. The bigger your deposit, the less you’ll need to borrow and subsequently pay back (with interest) to the lender. A larger deposit will also ensure you’re a prime candidate for the lowest rates, as you’re reducing the lender’s risk by contributing more upfront.
In summary, a smaller loan principal means lower monthly repayments and less interest to be paid throughout your home loan.
The table below shows how much you can save in the long run by increasing the size of your deposit. This example uses a $500,000 home loan, with a 30-year term and a 3% p.a. interest rate. Note that this interest rate is an example only, and even larger savings are possible with a lower interest rate:
| Deposit percentage provided | Monthly repayments | Total amount of loan repaid over 30 years | Total amount of interest paid | Total interest saving compared to a 20% deposit |
|---|---|---|---|---|
|
20% ($100,000) |
$1,686.42 |
$607,109.81 |
$207,109.81 |
N/A |
|
25% ($125,000) |
$1,581.02 |
$569,165.45 |
$194,165.45 |
$12,944.36 |
|
30% ($150,000) |
$1,475.61 |
$531,221.08 |
$181,221.08 |
$25,888.73 |
|
35%
($175,000)
|
$1,370.21 |
$493,276.72 |
$168,276.72 |
$38,833.09 |
|
40%
($200,000)
|
$1,264.81 |
$455,332.36 |
$155,332.36 |
$51,777.45 |
It’s not always possible to save up a large sum for a deposit. However, it’s possible to apply for a home loan with a deposit of as little as 5% in certain circumstances, particularly if your credit rating is good and your employment situation is stable. You can find lenders who offer loans with a sub-20% deposit if you’re prepared to pay Lenders Mortgage Insurance.
LMI is an insurance premium charged to the borrower to add another layer of security for the lender, protecting them in the event of a loan default. Even though it’s insurance to protect the lender, it’s the borrower who is required to pay the insurance premium. Paying LMI can substantially increase the cost of your loan overall. It’s important to note, though, that home loans with just a 5% deposit (or 95% LVR) are typically reserved for customers with a strong financial history.
Using the same $500,000 loan with a 30-year term and 3% p.a. interest rate, you can see how LMI affects how much you pay for your home loan.
| Deposit | Monthly repayments | Interest repaid | Additional LMI | Total extra cost compared to 20% deposit |
|---|---|---|---|---|
|
20% ($100,000) |
$1,686.42 |
$207,109.81 |
$0 |
N/A |
|
15% ($75,000) |
$1,791.82 |
$220,054.17 |
$4,887.50 |
$17,831.86 |
|
15% ($75,000) |
$1,791.82 |
$220,054.17 |
$4,887.50 |
$17,831.86 |
|
10% ($50,000) |
$1,897.22 |
$232,998.53 |
$8,820 |
$34,708.72 |
|
5% ($25,000) |
$2,002.62 |
$245,942.90 |
$17,480 |
$56,313.09 |
*Additional home loan fees not included in repayment estimates. LMI varies between lenders.
There are two Federal Government assistance schemes which apply to first home buyers. The New Home Guarantee supports new home owners by guaranteeing up to 15% of the deposit on a brand-new property.
There are property price caps in place in each state. The First Home Loan Deposit Scheme (FHLDS) can reduce the deposit requirement to as little as 5%. The difference between the two is that the FHLDS applies to the purchase of all properties, not just brand-new ones.
Each state also has a first home owner’s scheme which offers either lump-sum payments (from $10,000 to $15,000) or concessions from paying stamp duties or other taxes to assist first-time homeowners. For example, in the ACT there is a concession scheme to help people buy a home or land for the first time. This helps by reducing or even eliminating stamp duty for first home buyers.
There are household income caps to qualify for the no stamp duty concession, however.
In some situations, a lender may allow you to use the equity you have in other investments as security for your new loan as a replacement for the full 20% deposit. For example, if you already own one property with $150,000 in equity, your lender may allow you to use this as security for your second loan.
If you have other investments or assets, it’s also possible to use them as security for your new loan. For example, if you have money invested in the stock market or are the owner or co-owner of a business, you can use an agreed value of these investments as security.
Another person – most frequently parents or grandparents – can offer to be a guarantor for your loan. This means they guarantee the loan will be repaid, and they become responsible for repayments if you default on your loan for any reason.
To be accepted as a guarantor, the family member will need to be in a strong financial position and will have to submit their financial details to the lender. With the agreement, your guarantor can use the equity they have in their property as security for your loan, but be aware this means the lender will also take out a mortgage over your guarantor’s property. With a guarantor, some lenders will loan 100% of the cost of your home.
Pooling your resources with a partner or family member can give you greater borrowing power, so you won’t have to save up a 20% deposit on your own. As house prices increase, it’s becoming more common to co-purchase property with friends or family members.
Just be aware that co-purchasing a property is a long-term commitment, and it’s worth consulting a solicitor and getting a co-ownership property agreement before deciding to buy a house jointly with family or friends.
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