If you’re saving money for a home loan deposit, it could be difficult to determine when to stop saving and actually go ahead and put down a deposit to buy a property.
A home loan is a long-term commitment that you’re likely to pay down over a couple of decades or more. The more money you put upfront, the lesser will be your future burden. But it’s neither possible nor practical to continue saving for a deposit forever while property prices continue to skyrocket year after year. So how much of a deposit do you actually need to buy a house, and why do you even need a deposit in the first place?
What is a home loan deposit, and why do you need it?
A deposit is an initial payment you will make towards your home’s purchase price. By paying a deposit, you own a small part of the house upfront. When you own a part of the house by paying a larger deposit, it reduces the risk to the lender who’s advancing the loan to you. That’s the main reason why lenders require you to put down a home loan deposit – to reduce their level of risk in case you default on the mortgage.
By saving as much money as possible for your home deposit, you can also reduce the amount of money you need to borrow, which could help reduce the amount of interest you pay over the life of the loan. Having a smaller-sized loan could also mean paying it off sooner.
How much deposit do I need for a home loan?
In the past, borrowers could get up to 100% LVR loans (loans for the full value of the property) for purchasing a property. However, you’re unlikely to find a lender who’ll allow you to borrow money without any deposit in present times. In general, having a deposit that covers up to 20% of the property’s price and some additional savings to pay the extra costs (like stamp duty and conveyancing fees) could make it easier for you to qualify for a home loan.
A 20% deposit could have several other advantages, such as:
- A larger deposit can help you qualify for a lower rate by reducing the level of risk you pose to the lender.
- A higher deposit might make you eligible to borrow from a wide range of lenders, giving you several options to choose from.
- A larger deposit means a smaller home loan, which could mean more manageable monthly repayments over the loan term.
- You’re generally not required to pay for Lender’s Mortgage Insurance (LMI) when you put down a 20% deposit, which could otherwise be a significant expense.
But what if you don’t have a 20% deposit?
With the average house price in Australia touching $800,000, saving $160,000 to pay for a house upfront isn’t easy. It’s also true that increasing property prices can make it challenging to reach the 20% mark, as the amount you need to save will continue rising as prices hike. In case you don’t have enough money saved for a 20% deposit but are well-positioned to service a home loan, there are a few options you can consider to buy your first home with a low deposit.
1. Low deposit home loans with LMI
If you meet the general eligibility criteria for a home loan but don’t have a 20% deposit, some lenders may allow you to borrow up to 95% of the property price with Lender’s Mortgage Insurance or LMI.
LMI is a type of insurance that protects the lender if you default on your home loan repayments. The cost of LMI depends on the size of your loan and could run into a few thousand dollars. However, you might have the option to roll this amount into your home loan, which can make it easier to purchase your house but see you paying more interest over the life of the loan.
2. Professional home loans
Professionals like doctors, lawyers, and chartered accountants who are known to earn incremental salaries over the years are generally perceived as low-risk borrowers by lenders. If you belong to a category of high-income, low-risk professionals, you may be eligible for a professional discount on your home loan, including an LMI waiver and lower interest rates than other borrowers. A mortgage broker can help you assess whether you’re eligible for a professional discount and put you in touch with lenders offering the best deals for your situation.
3. Family guarantee home loans
If your parents own their house, they can help you borrow money for a property by using their home equity to guarantee your mortgage. With a guarantor home loan, it’s possible to borrow the full price of the property, but it’s important to understand your parents will be responsible for your mortgage in case you default. It’s worth speaking to a financial expert, as well as legal professionals, before entering into a guarantee arrangement to make sure all parties understand their rights and responsibilities to avoid any issues at a later stage.
If your parents cannot guarantee your home loan, they might be able to help by offering some cash you can use as part of your deposit. Many lenders accept gifted funds as part of the deposit but ensure you have proper documentation to substantiate the gift. It’s also important to have some genuine savings in your account that will make you appear financially responsible to lenders. While many lenders accept gifted deposits, they require you to save at least 5% of the property’s price over time to demonstrate financial discipline and a savings habit.
4. First Home Owners Grant (FHOG) or other applicable government schemes
If you’re a first homeowner, it’s worth checking your local state government’s revenue website for any applicable grants, such as the FHOG, that could be used to beef up your deposit.
You could also check if you’re eligible for federal schemes like the First Home Guarantee (FHG) that could help you purchase your first home with as little as a 5% deposit without paying for LMI. You can check with a mortgage broker to know whether you’re eligible for any state grant or federal guarantee or ask a Hashching expert for more information on the topic.
By Vidhu Bajaj
Hashching Content Writer
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