How much deposit do I need for a home loan?
The size of your deposit plays a huge role in your home loan
The size of your deposit plays a huge role in your home loan.
How much deposit do you need to buy a house in Australia?
While home ownership is a dream for many in Australia, it is a big financial investment - and for a lot of us, it’s easily one of the most expensive purchases we’ll ever make in our lives. In fact, saving up for a house deposit 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 do you actually need to save?
Typically, the minimum amount you’d need to save is around 10% to 20% of the property purchase price, depending on the lender. When you see a ‘loan-to-value ratio' or ‘LVR’ of 90%, this would mean you need a minimum 10% deposit and if it’s 80% you need a minimum of 20% deposit and so on.
According to the ANZ CoreLogic Housing Affordability Report 2022, it takes a median income household 11.3 years to save a deposit on a home loan. Across the combined capital city markets, the report revealed the time it takes to save a deposit saw a marginal fall from 11.14 to 11.11 years - the equivalent of 11 days.
A report published in early 2022 from Domain revealed Sydney held the title as the market requiring the longest period to save a 20% deposit for an entry-priced home, at eight years and one month.
While it’s tempting to ask for a home loan with the lowest deposit requirements to get your foot in the door sooner, this comes with some downsides, which we’ll explain later.
How much do you need to save for a home loan deposit?
According to the latest CoreLogic data, the median home value in February 2023 was $702,136. Using this ‘average’, the deposit requirement breakdown is as follows:
| LVR | Deposit % | Deposit $ |
| 90% | 10% | $70,213 |
| 80% | 20% | $140,427 |
| 70% | 30% | $210,640 |
Lenders Mortgage Insurance - LMI Explained
Typically, the borrower pays what’s called ‘lenders mortgage insurance’ - or LMI for short - if their home loan deposit is smaller than 20%.
So, if you were to put down $70,213 (using the example above) as a deposit on a home, you would be required to pay LMI to your lender.
The two largest LMI providers in Australia are QBE and Helia Group (formerly 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 for a home quicker, you’ll also have to consider the additional cost of LMI, which is often nothing to sneeze at.
How much is LMI?
Based on the CoreLogic median property price of $702,136, a borrower with a 10% deposit would pay an upfront cost of $12,638 in LMI.
In comparison, with a 15% deposit - or 85% LVR - the LMI premium would be approximately $5,968.
This rate applies to first home buyers/owner occupiers who have purchased the property to live in over a 30-year loan term.
What are other costs to consider when applying for a home loan?
Your home loan deposit isn’t the only thing you’ll need to save and budget for. When buying a property, there are other upfront costs you’ll need to consider which can include:
- Conveyancing or legal fees
- Stamp duty
- Building and pest inspections
- Building insurance
- Establishment and registration fees
If you’re a first home buyer, make sure to check whether you’re eligible for any stamp duty exemptions or first home owner rebates in your state or territory. By doing this, you could keep some cash in your pockets.
What are the factors that can affect your loan and interest rate?
One of the primary factors that can influence your loan and interest rate is your credit score. A credit score allows lenders to view your reliability as a borrower, and is calculated based on your credit report. The information obtained from this report generally includes your credit history such as past/current loans, credit cards, and payment history.
Some lenders may offer lower rates for borrowers with higher credit scores, whereas others may have the same interest rates regardless of credit score, like loans.com.au. For instance, if you regularly pay your bills in a timely fashion, you are likely to have a high credit score which makes you a low risk borrower.
However, if you often forget to pay your bills and don’t keep on top of your debt repayments then you are at risk of obtaining a low credit score. In the lenders’ eyes, this makes you a high-risk borrower which may affect your loan and interest rate.
The other important factor that can affect your loan and interest rate is your ability to save. By showing consistent savings techniques, the lender will recognise that you should be able to service a loan and make regular repayments. One way you could do this is by putting money away every week, fortnight, or month.
Why does the size of your home loan deposit matter to lenders?
Generally, lenders favour home loan applications that have a larger deposit contribution. This comes down to three reasons.
Interest rates
Your deposit amount can have an impact on the interest rate of your new home loan. The bigger your home loan deposit, the more bargaining power and choice of lenders you may have. You may even have the chance to be offered a discounted interest rate.
You pay less interest
The less money you borrow from your lender, the less you have to pay off which means you’ll also be paying less interest. A large deposit will save you money in the long run.
Lenders mortgage insurance
As explained previously, if your home loan deposit is smaller than 20%, LMI will likely be applied as you’re deemed more ‘risky’ as a customer. Whereas if an applicant has a deposit larger than 20%, LMI will not be charged.
Pros and cons of your home loan 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.
- You’ll need to borrow less, which means you’ll pay less interest (potentially saving you thousands) and possibly have lower monthly repayments.
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 deposit you put towards your home loan is a personal decision, and often comes down to patience, versus convenience, versus costs.
How can you improve your chances of getting approved for a loan with a smaller deposit size?
If you’re planning on getting your foot on the property ladder but are worried that your deposit is too small, then you’ll be pleased to know that it’s still possible to qualify for a home loan.
If your home loan deposit is between 10 and 20%, you want to make sure you’re doing everything you can to improve your chances of getting approved.
Here are the 4 things you can do to get that dream home of yours:
- Start saving as early as you can - Save, save, and save some more. Putting money aside over a period of time shows lenders you know how to budget and also how to responsibly save your income. It also showcases the motivation you have towards saving for your deposit.
- Pay off your debt - Having debt such as a car loan or credit card bill can impact your chances of loan approval and borrowing power. Make sure to pay back debt so you have as little as possible remaining.
- Ensure your credit score is high - It’s as simple as paying your bills on time and keeping on top of debt repayments. Lenders will look at your credit report to see whether you are or will be a responsible borrower.
- Lower your expenses - Consider trimming your living expenses if they’re a little on the higher side as it can have an affect on your borrowing power. Examine your outgoings and see what’s worth spending and what isn’t.
What if I’m struggling to save for a home loan deposit?
There are options available to help build your home loan deposit. 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) which allows first home buyers to purchase a home with a deposit as low as 5%, without the need to pay LMI. This means you can borrow up to 95% of the property value, with the federal government providing 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.
The Family Home Guarantee helps single parents with dependents build or buy a home with a deposit as low as 2% without needing to pay LMI.
If you’re struggling to save a deposit on a home, you may also be able to get help from a family member who can act as a quality guarantor. Essentially, the guarantor agrees to use the equity in their property as additional security for your property, instead of a cash deposit. Further, a guarantor is legally responsible for the mortgage repayments should the borrower fail to make them.
Once you’ve paid off part of the loan or your property has increased in value, you may apply to remove the guarantor.
If you’re ready to take the property plunge, speak with one of our lending specialists today to find out how much of a home loan deposit you need, as well as getting pre-approval so you can go property hunting.
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.
