Are you an Australian home buyer working out your house deposit size?
We’ll help you figure out what you need to consider upfront to meet the purchase price and other costs when getting onto the property ladder.
What is a deposit?
A home loan deposit is your initial contribution to the purchase price of a property. The deposit is what you use to secure a home loan, helping you purchase property for more than you have saved.
Deposits are important because they affect your loan-to-value ratio (LVR) (a simple calculation that helps determine your risk to a bank) and your interest rates.
In Australia, lenders have certain loan eligibility criteria. Most financial institutions require a deposit amount of 20% of the purchase price of the home (plus enough extra savings to cover transaction costs such as solicitor/conveyancer fees, stamp duty and government taxes. There are also additional fees to budget for if it’s an investment property).
Due to increasing house prices and deposit amounts, Australian lenders are more and more accepting alternative deposit options - such as lender’s mortgage insurance (LMI).
How much deposit do I need?
The size of the deposit you require depends on a couple of things: the house price you’re targeting, the financial product or pathway you want to take (which often requires different deposit contributions) and your available savings.
Work out your buying power.
Step one is to understand the kind of house price range your financial situation allows. One way to determine your price range is to use a buying power calculator (also known as borrowing power).
A buying power calculator uses a range of inputs, including your income and liabilities, to estimate what you may be able to borrow from a lender. Combined with your savings, this will help you understand your house price maximum.
For example, if your buying power is $1,000,000 and you have a $200,000 deposit saved, you could consider a home where the property purchase price is $1,200,000.
It’s important to know that some home loans require a minimum contribution such as 5%, 10% or 20% of the purchase price - so your buying power may be lower than you expect based on your income if your savings can’t support a larger loan size.
Why is a larger deposit better?
In general, a larger deposit means you’ll need to borrow less for your new home, which means you’ll pay less interest and potentially lower monthly repayments.
Most lenders will use a loan-to-value (LVR) calculation as part of their lending criteria. This one way to assess the amount they are willing to lend for a home loan. LVR is the amount of your loan compared to the Bank’s valuation of your property, expressed as a percentage.
For example, a loan amount of $400,000 to buy a property worth $500,000 results in a loan-to-value ratio of 80%. Banks place a limit on the loan-to-value ratio depending on things such as the type of property, the location and your financial position. Plus, you need to have money saved for stamp duty and other costs.
Typically, a larger deposit indicates to a lender that you have healthy financial habits, can stick to a savings plan, and have a historical record of being able to make genuine savings. The lender can then assume that you will make your home loan repayments.
What if I don’t have a 20% down payment?
You have a few options if you have a smaller deposit:
- Try to get a low-deposit home loan and pay Lenders Mortgage Insurance (LMI). Many lenders will require LMI when your LVR is over 80%. Although expensive, you can pay this cost on top of your deposit or include it in your home loan amount. Keep in mind, if you refinance your loan with equity below 20% of the value of the property, then you could be charged LMI a second time.
- Get help from your family. Consider a family guarantor. On your loan application, you would apply with a close family member providing security in the form of savings or equity in their property to support your application. This can reduce your upfront cost but can mean your family is liable for any default. You can also get a family loan or parental gift for your deposit.
- Continue to save more towards a deposit. There are ways to help grow your savings and get your finances in check before buying a house, such as putting money in a term deposit or paying off any credit card debt. Our home loan deposit calculator helps you estimate how long it’ll take to save for your dream home.
Additional deposit support for first-time buyers
The federal and state governments in Australia have programs tailored for eligible first-home buyers who plan to become owner-occupiers, helping them towards their first home. Learn more online.
- First Home Owner Grant (FHOG) - ACT, NSW, QLD, NT, SA, TAS, WA.
- First Home Loan Deposit Scheme
- First Home Guarantee Scheme
- First Home Super Saver Scheme
Remember: if you need help deciding which is right for you, mortgage brokers and independent financial advisors have a legal requirement to act in your interests only.
Other upfront costs to consider
There’s more to buying a home than just the cost of the house itself. There are some other upfront costs you’ll need to account for (and have money to spare in your savings account to cover).
Stamp duty is a state and territory government tax that can fluctuate depending on things such as location, whether it’s a first home, new home or an investment, and the price of the property. Check out our Stamp duty calculator to work out how much you could have to pay.
Buying a property is a legal process and you may choose to use the services of a conveyancer. Conveyancing (the transfer and sale of real estate) can include a property and title search, the review and exchange of the contract of sale, the transfer of the title, and other aspects too.
Mortgage establishment and registration fees
These can depend on the state in which you live and who your lender is. Ask about these when you apply for a home loan.
Buyer’s agent service fees
If you decide you’d like help navigating the Australian property market, you might want to consider a buyer’s agent. They assist with finding, inspecting and negotiating with real estate agents on your behalf.
- Know your price range, and how much of a deposit have available.
- Be aware there are other costs to consider when buying a home.
- Your personal circumstances and how your finances are organised can affect how a lender approaches your home loan.
- If you’re a first-time buyer, government support could be available.