I couldn’t count the amount of times I’ve been asked casually by friends and colleagues: “How much deposit do I need for a home loan?”
Deposits to secure finance for home loans have become a pain-point for a generation, as property prices continue to reach record highs. On top of this, saving for a deposit and getting home loan approval is a process for which there is no ‘one-size-fits-all’ solution, so getting the right information for your needs can prove tough.
In response to some of the recurring questions I get asked about Home Loans, here’s how to make sense of it all.
How much deposit do I need?
It all boils down to:
- How quickly you can save, and your desire to be in your first home sooner: So, what is the minimum deposit for a home loan? The figure of 20% being required for a deposit is a common one, but lenders across the country will usually accept a deposit somewhere in the vicinity of 5% to 25%. Of course, if you’re comfortable to wait until you have 20% of your purchase price saved, by all means go for it – you’ll be a more attractive prospect for many lenders. However, if you’re desperate to have your own place sooner, there are options available to you.
- What your lender will do in terms of a deposit percentage: Different lenders will accept varying deposit amounts when applying for a home loan. For example, at Greater Bank, we’re able to accept deposits as low as 5%, however in situations like this, you may be required to purchase what’s known as Lender’s Mortgage Insurance (LMI). For more on LMI, see below. I also get asked a lot – “Can I get a home loan without a deposit?” and another option that may be open to would-be buyers looking to get into the market sooner is our Family Pledge, or Guarantor Loan. In situations where a potential buyer isn’t able to save the full 20% deposit amount, they may be able to use equity in a parent or guarantor’s property to secure their own home loan. For more on our Family Pledge Loan, click here.
- Whether you’re prepared to accept LMI: LMI is basically a one-off payment you make when you’re unable to save the full 20% deposit amount for your home. It protects the lender in the event you become unable to meet your loan repayments and default on the loan at any point. The amount you pay in LMI is linked to your saved deposit amount – the smaller your deposit percentage, the larger the amount you pay in LMI. The good thing is, however, that at Greater Bank, you are able to include your LMI payment in the total cost of your loan, meaning you can repay it over time in addition to your loan repayments, and get into your new place sooner.
So, is a bigger deposit better?
Yes and no – it all depends on your circumstances.
- Yes: if you’ve saved a deposit representing 20% or over of the cost of your property, you’ll be able to avoid LMI and will be seen as a lower-risk candidate for a home loan.
- No: As long as you’re comfortable with the fact that you’ll need to purchase LMI, or you have the option open to you to pursue a Family Pledge or Guarantor Loan, a full 20% deposit may not be required, and you can still approach lenders with a view to buy when you’re ready. It helps if you can see LMI as a ‘cost of doing business’ which will allow you to get a foothold on the property ladder sooner.
Are there any other costs I should be aware of?
Absolutely. Too often first time buyers focus so much on just reaching that magical deposit figure, and forget to budget for the other associated costs that come with buying a home.
Where this gets people into trouble is, if you’ve saved a total of $50,000 to buy your first place, but haven’t factored in costs like stamp duty, legal fees, strata (where applicable), valuation & inspections and agent costs, your perceived deposit quickly gets eaten into, and you may be in danger of falling below the 20% deposit mark, in which case you may then be asked to purchase Lender’s Mortgage Insurance.
By doing your research early, and speaking to a lending expert early on in your home buying journey, you should be able to navigate your way to home ownership on your own terms.