Australian home buyers need six-figure savings to afford a home loan deposit

Woman cringes at home loan deposit size collage

House prices in Australia have been daunting for a while, but while soaring values are good for investors and owners building home equity, they’re bad news for first-home buyers. 

According to Mozo’s analysis, Australians nationwide now need at least six figures in savings to afford the 20% home loan deposit required for the average mortgage. For many home buyers, this could mean saving two and a half times their yearly income. 

“Despite rising interest rates historically leading to a drop in housing prices, the cost of buying a home in Australia is becoming increasingly unaffordable,” says Mozo banking and rates expert Peter Marshall. 

“Borrowers are now searching for more than $100,000 to cover a 20% deposit.”

So what’s the average deposit size in Australian states and territories? And is buying with a small deposit worth it?

Average home loan deposit size by Australian state and territory

Unsurprisingly, New South Wales has the steepest home loan deposit costs. Housing markets like Sydney have significantly skewed the savings needed just to get in, and now NSW buyers need $233,500 in savings to afford a 20% deposit. 

According to data from the Australian Bureau of Statistics, a deposit of this size is 245% of the average NSW annual income. 

Average dwelling value
20% home loan deposit
Average annual income
% Average annual income

But the place with the cheapest property, the Northern Territory, isn’t much better. The average property price in NT is $521,700, meaning a 20% deposit is $104,340, which is still over 110% of the average yearly earnings in the territory.

Why is the standard home loan deposit 20%?

Many studies average deposit size by state collage

The purpose of a 20% home loan deposit is to establish your loan-to-value ratio (LVR) and give you a financial stake in your home. The deposit pays part of the upfront property price. 

If you have a 20% deposit, you own 20% of your home. A home loan covers the remainder, giving you 80% LVR. 

This LVR tier is where borrowers get the most competitive interest rates. An LVR higher than 80% is financially risky in the lender’s eyes since the borrower could struggle to afford their home loan repayments. 

To offset the financial risk, lenders slap buyers with smaller deposits with additional fees, such as higher interest rates and Lenders Mortgage Insurance (LMI), which can add thousands of dollars to mortgage repayments. 

Lower LVRs, on the other hand, receive lower interest rates because the risk to the lender is smaller. They also don’t have to pay LMI. 

You can see this play out in the latest averages for owner-occupied home loans tracked in the Mozo database. The difference below 80% is less severe. Above 80%? The interest rate skyrockets.

Average home loan interest rate by LVR tier – (19 September 2023)

LVR Tier
Average interest rate
6.52% p.a.
6.57% p.a.
6.60% p.a.
6.92% p.a.
7.16% p.a.

Borrowers buying with a small deposit (< 20%) could just decide to pay the higher interest rates. However, their home loan applications will be run through serviceability tests, meaning lenders will see if they can afford principal & interest repayments at a rate up to 3% higher than the one they apply for. A 7% interest rate may be fine, but could you theoretically afford a 10% one? 

Given that saving for the deposit can be a stretch, this interest rate may be a tall order – especially with average Australian incomes only ranging between $84k and $106k.

Is it a good idea to buy with a small home loan deposit?

Woman reaches for first home deposit collage

Government schemes such as the Family Home Guarantee can help bridge the deposit gap for a select few borrowers, usually first-home buyers. 

There are other options available for buying with a smaller deposit, too, such as:

  • Having a guarantor.
  • Accepting the deposit from a family or friend as a cash gift.
  • Using a deposit boost loan, such as through OwnHome

The viability of these pathways will depend on your financial situation. However, there are risks to consider with each, warns Marshall. 

“A [small] deposit may seem enticing, but a loan with a lower deposit will cost more in interest over the term of the loan,” Marshall explains. 

“With smaller deposits, it’s also very easy for a negative equity situation to arise, so it’s crucial to get professional advice from a broker before being enticed by the low deposit amount.”

Until then, housing affordability will require governmental reform

Can you afford a $600,000 or $750,000 home? How about $900,000? Crunch the numbers with Mozo’s home loan calculators.

Compare low-deposit home loans in the table below.

Compare low deposit home loans - last updated 9 December 2023

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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