How much deposit do I need for a home loan?
While buying a property is an exciting time, what’s not exciting is getting your head around all the home buying number crunching. Even before you need to think about what your loan repayment costs will be or how much stamp duty you’ll need to pay, you’ll need to save up a deposit.
How much deposit you’ll need for a home loan will depend on whether you are buying a house or apartment to live in or as an investment.
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If you are purchasing a property in which you will live, the standard down payment you will need for a home loan is 20% of the value of the property. This means if you’re looking to purchase a property for $500,000 you’ll need a home loan deposit of $100,000.
Saving up $100,000 is no easy feat, which is why lenders offer more flexible options to owner-occupiers to help get you in your dream home sooner. In the past it was possible to get a loan without any deposit but this is no longer the case.
The minimum deposit you’ll need for a home loan is 5%, as the maximum you will be able to borrow is 95% of the property value. When talking about how much deposit you’ll require for a home loan, there is some must know jargon you’ll need to be across:
Loan to Value Ratio (LVR): LVR is the ratio of the loan amount you wish to borrow in relation to the value of the property you’re looking to purchase. For example if you’re buying an apartment for $250,000 and you have a 10% deposit of $25,000, your LVR is 90%.
Lenders will use the LVR calculation to determine whether or not you will have to get mortgage insurance. You can work out your LVR easily by dividing the loan amount by the value of the property and then multiplying this amount by 100. If your home loan has an LVR of 80% or more you are required to take out Lender’s Mortgage Insurance.
Lender’s Mortgage Insurance (LMI): LMI is an insurance that protects the lender in the unfortunate event that you default on your mortgage repayments. The cost for this insurance can be up to 3% of your home loan amount and can be included either as an upfront cost or in your loan repayments over the term of the loan.
It is important to understand that this insurance does not protect you if you can’t meet your repayments, it covers the bank. If you want to cover yourself in case of illness and redundancy you need to take out mortgage or income protection insurance in addition to LMI.
If you are looking at purchasing an investment property then how much deposit you’ll need for a home loan will be different than someone who is buying a property to live in. The reason is, that many of the major banks have changed their lending criteria for investment loans. It used to be that you would only need a 5 - 10% deposit for an investment loan, but this has now changed and you’ll now need a 20% downpayment for a home loan.
Some non-bank lenders will not have the same criteria so depending on your overall financial situation it may be possible to still get a low deposit investment loan. If you fall into this category, speak with Mozo’s home loan experts. We deal with a range of non-bank lenders and can help you to find a home loan that’s suitable for your investment needs. Learn more and send us a enquiry to Mozo Home Loan Negotiators.
Home Loan Deposit Calculator
So now that you have got your head wrapped around all that home lending jargon, it’s time to find out how much deposit you will need for a home loan. Here’s our deposit saving cheat sheet which helps you to calculate how much you’ll need to save.
20% Deposit - LVR <80%
- More competitive interest rates
- Don’t have to pay LMI
- Larger loan amounts
- Bigger deposit
- Takes longer to enter property market
10% Deposit - LVR 90%
- Get into the market quicker
- Greater choice of home loan
- Need to pay LMI
- Limited availability for investors
5% Deposit - 95% LVR
- Less time to enter property
- Need to pay LMI
- Not widely available
- Smaller maximum loan amounts
Tips for saving a home loan deposit
Now you know how much you need for a deposit you can get on the fast track to home ownership with these sure-fire saving tips:
1. Check out your state’s FHOG scheme
Attention first home buyers! The First Home Owners Grant, a one-off and tax-free payment, could be the key to cracking that 20% home loan deposit you need. See your state's grant amount and requirements here. With a visit to our first home buyers hub you can also find other useful tips to secure your dream home sooner.
2. Take advantage of the First Home Saver Super Scheme (if you can)
Want to fast-track your savings? From July 1 2017, first home buyers can sacrifice a portion of their salary and top up their super. There are juicy tax benefits to this scheme, especially once you reach the $30,000 savings limit and withdraw your funds (as required by the Australian Tax Office), for the purpose of buying your first home. Read more about the scheme in this detailed guide.
3. Show genuine savings
These days most Aussie lenders have a mandatory genuine savings requirement which means if you’re applying for a home loan with an LVR of more than 85% you’ll need to show proof of regular savings of at least 3 months.
You can grow your genuine savings nest egg by setting up direct deposits into a high interest savings account. Search for a competitive savings account in Mozo’s savings account database.
4. Consider asking a family member to go guarantor
Saving for a home loan deposit can be a lengthy process, so if it is an option available to you consider getting a parent or family member on board to act as a security guarantor to your home loan. Not only will this help you get in the property door sooner, but you’ll also avoid the cost of lenders mortgage insurance if you don’t have a deposit over 20%.
A little sacrifice goes a long way when saving up for the deposit of your dream home, so say goodbye to your Friday night take-outs and impromptu overseas adventures (for now). Punch your income and expenses into the Mozo budget calculator to see where you can afford to tighten your waistband.
6. Calculate your (hypothetical) repayment costs
Determine how much your monthly repayments will be using Mozo’s home loan repayments calculator and if they’re more than expected it may just mean that purchasing a smaller property or looking for a property in a more affordable area is on the cards.
7. Get a second job
Dust off your CV and apply for a casual job on the side. Jobs like bartending or working in the hospitality industry are booming right now and can really kickstart your savings in a big way (think about all those tips!).
8. Work out how much you could borrow on your income
How much you'll be able to borrow will differ depending on your income -
what you can borrow on a $50,000 income is pretty different to what you
might be able to borrow if you're earning $100,000 a year.
If you know how much a lender is likely to let you borrow on your income, you'll have a clearer idea of not only the kind of properties that might be in your price range, but also what sort of deposit you'll need to save up. If you can borrow $250,000, and your dream home is worth $310,000, you'll need to make up the difference as a deposit.
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