What is a house deposit, and how much do I need for a home loan in Australia?

Research shows that in July 2022, the average first home buyer is saving $119,560 to get their foot into the property market.

Home Ownership
Guides
by
Erin Howell

Saving for a house deposit is a daunting process. Research shows that in July 2022, the average first home buyer is saving $119,560 to get their foot into the property market. The size of the average home deposit has risen higher than the average person's yearly salary of $90,916.

When purchasing a home, many costs are involved, including your deposit, stamp duty, legal expenses, mortgage establishment fees, home registration fees, lenders mortgage insurance and the impact of interest rates on your purchasing power.

This guide will distil how much you need to get a mortgage and the other upfront fees involved with buying a home.

What is a deposit?

As a property purchaser, you pay a deposit to secure a property from the time of purchase to the settlement period. The remaining balance is paid at settlement, and the title is changed into your name.

A typical house deposit is 20% of the property value over a 25-30 year loan term.

Another option people take is paying a smaller deposit and paying Lenders Mortgage Insurance (LMI). LMI is a one-off insurance fee that needs to be paid by the borrower to protect the lender as insurance to support them if they cannot recover the loan amount. LMI is usually required if the borrower takes out a loan over 80% of the property's value. Paying LMI can add tens of thousands of dollars depending on the value of your property.

When you pay a smaller deposit, the property's loan-to-value ratio (LVR) goes up. LVR is the loan value divided by the property you buy. The higher the LVR, the riskier the loan is to the lender. This means that the interest rates they offer will also likely be higher.

The deposit is your initial contribution to the home purchase, the percentage deposit you pay represents the small portion of the home that you own, and the bank owns the rest as they lend to you on a secured loan.

A secured loan requires some collateral as a condition of borrowing. A bank or lender can use the house you live in as collateral for the loan, meaning if you fail to pay the loan, the lender can seize the home to pay back the owed amount.

Home buyers can spend years saving for a deposit in a savings account, term deposits or other equity markets until the time is right to purchase a home; often, it takes years of home buyers being on a savings plan to save a deposit. Some home buyers have access to family members or the bank of mum and dad, who help them with a deposit by receiving money as a gift.

Emerging rent-to-own providers, like OwnHome, are supporting Australians to rent their dream homes for 2-7 years while building a security deposit that will eventually come off their pre-agreed purchase price. If house prices rise and there is equity in the property above the pre-agreed price, you keep the financial upside, meaning you can make equity from day 1.

What is ‘proof of genuine savings’?

Genuine savings is money you've personally saved up over time. Lenders usually want proof of genuine savings if you're borrowing more than 85-90% of the property value. A lender wants to know that you have saved up money over time, showing your ability to save and commit money towards the purchase. This will mean that even if you are  gifted money from a family member or parent, you will still need to show proof that you can save for yourself and afford the repayments on the loan.

Does my deposit affect my interest rate?

In some cases, the size of your deposit and loan can impact the interest rate you’re provided. Interest rates are usually higher on homes with a high loan-to-value ratio (LVR). The LVR helps lenders assess the level of risk they're exposed to when approving your loan application. The higher the LVR, the higher risk the lender is taking.

The amount of money you pay in interest is calculated from the size of the loan. Therefore, if you borrow less money (because you have a larger deposit), you’ll likely pay less interest over the life of your loan. 

However, larger loans tend to provide mortgage brokers or lenders with more leeway to negotiate on the interest rate itself, so you may be able to bring down total payments without having a larger deposit.

What are the other fees I can expect? How much are the fees?

As mentioned earlier, unfortunately, the deposit isn't the only upfront cost you will come across when looking to buy a new home. Some other charges include:

Government Charges
Stamp Duty

Stamp duty is one of the highest costs of buying a home after the deposit. This is also known as transfer of land duty, a tax payable in Australia on any property purchase. Each state and territory has rules for calculating stamp duty, some being more expensive and complex than others. Some states have stamp duty waivers for First Home Buyers, which we see below.

The cost of stamp duty on a $700,000 is around $27,000 in NSW, $25,000 in QLD and $37,000 in Victoria.

Registration Fees on the property

This is the fee lodged and registered by your conveyancer or solicitor to record the change of ownership. This occurs whether a home is being purchased or you are refinancing. The cost of this varies in different states and territories.

Registration fees are typically less than $200 for each NSW and QLD.

Registration Fees on the mortgage

Registering your mortgage documents with your state or territories Land Registry involves a fee. The cost of this varies in different states and territories.

Registration fees are typically less than $200 each in NSW and QLD.

Title Search Fees

This is another search completed at the time of purchase to check ownership and any encumbrances (e.g. mortgages or loans) held against the property. The cost of this varies in different states and territories.

Title searches are typically less than $200 each NSW and QLD.

Purchase costs
Conveyancing or Legal Fees

When you purchase a home, you may want to engage a conveyancer or solicitor to look after the preparation of legal documents and contracts, including the transfer of ownership and settlement.

Building and Pest Inspections

The role of the building and pest inspectors is to thoroughly look around the house, including the roof and underground cavities, to understand if there is any structural or cosmetic damage to the home that can cause you issues down the line. These inspectors will also check for pests or future risks of pests - like termites.

Financing costs:
Loan Approval Fees

Most lenders or mortgage brokers charge a loan approval fee to cover the costs of preparing security documents, application, and loan establishment costs. These details will be outlined in the product disclosure statement of the loan you are taking out.

Lenders Mortgage Insurance (LMI)

As discussed earlier, LMI is a once-off cost paid if you have an LVR below 80%. As a rough guide, LMI could be around $10,000 extra on top of your deposit if you paid a $50,000 deposit on a $50,0000 home (90% LVR).

Other costs to consider:
  • Moving costs
  • Home and Contents insurance

How much deposit do I need to save?

A typical deposit is 20% of the property's purchase price. You can calculate the deposit amount by understanding your borrowing power from your lender, then calculate the maximum deposit amount by calculating 20% of its value. Lenders may have a borrowing power calculator on their website.

Larger deposit = less mortgage

Having a bigger deposit will mean you owe less to the bank; in saying this, sometimes this isn't always the best option for your circumstances. Having a bigger deposit also means your loan repayments will be lower. This can mean years of savings which can continually put you behind in a runaway market.

Having a smaller deposit but the financial ability to repay the repayments is an experience many people face. It can be challenging to save a deposit while paying rent. Struggling with savings is something that a lot of First Home Buyers experience.

It is important to know your options, like rentvesting. This is a concept where you buy a home somewhere you can afford and rent the property. While you rent somewhere, you want to live.

For owner-occupiers, we have articles comparing your options as well.

If you're looking to discover some additional options for how to get into your own home, check out some of our articles on rent-to-own vs a traditional home loan or rent-to-own vs paying LMI.

If you still want to know more, check out how rent-to-own works or if it's a legitimate way to buy a home; we have summarised that too.

First home buyers grants

First Home Buyers grants are available around Australia to help get first-time buyers into their homes. There are many first-home-owner grants available across Australia.

Note that while these are national schemes, they are funded by individual states and territories. This also means that the rules and eligibility criteria regarding the grant are different in each area.

First home super saver (FHSS) scheme

The government-initiated first home super saver (FHSS) scheme allows you to voluntarily contribute up to $15,000 to your super each financial year. 

You can withdraw a maximum of $50,000 from this contribution to pay your first home deposit. 

Note that this scheme's terms and eligibility criteria can change, and it's best to consult the ATO for the latest updates. 

Low and no-deposit options

There are many low and no deposit home options available to purchase your home in Australia. Learn more about guarantor home loans, rent to own homes and purchasing LMI online.

Rent-to-own with OwnHome

OwnHome offers a rent-to-own pathway for first-home buyers to accelerate the process of living in their dream homes. OwnHome is backed by the Commonwealth Bank.

OwnHome saves homeowners the struggle of needing to save hundreds of thousands of dollars for a deposit. Here is our simple 5 step process:

5 steps for rent-to-own with OwnHome

Example

OwnHome purchases your dream home for $1,000,000. You start living in it and pay fortnightly rent to OwnHome. Part of this payment goes towards your security deposit (which you can use to buy back your property from OwnHome).

The property's value will increase each year at a pre-agreed fixed rate. Between 2-7 years after the start of your agreement with OwnHome, you can choose to buy your property.

After five years, the property purchase price has increased at the fixed rate to $1,200,000, and you've contributed $150,000 towards your Security Deposit. You will only need to secure financing for $1,050,000 if you choose to buy the property.

If the value of the property has grown above OwnHome's pre-set price, you keep the upside. Let's say the OwnHome price is $1,200,000, but the home is valued on the market at $1,400,000; you keep the $200,000.

This means your equity in the home is equivalent to $350,000: the $150,000 security deposit and the $200,000 capital gains. Therefore, you'll need to secure $1,050,000 of financing with an LVR of 75%.

At OwnHome, we help all customers navigate home purchases and get onto the property ladder without needing hundreds of thousands in deposit savings. If you're considering buying a home and want to learn more about rent-to-own, you can use the buying power calculator online.

Please note: This article is intended to be general in nature and is not personal product or financial advice. It does not consider your objectives, financial situation, lending criteria or needs. You should always engage appropriate professional advisers to assist you in making significant financial decisions.

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