Six Figure Savings: That’s What You’ll Need To Afford A 20% Home Loan Deposit

Key Points:

• To afford a 20% deposit, borrowers now need six figures in savings

• A 20% deposit in NSW is now (on average) a whopping $233,500

• A 20% deposit is (on average) roughly one and a half times the average annual earnings. In NSW, it’s more than double, and that’s pre-tax.

• Mozo experts warn that getting a home loan with a smaller deposit has its pitfalls, and borrowers should be cautious of buying with low deposits.

No matter where you live in Australia, saving enough for a 20% home loan deposit is now synonymous with having six figures in the bank, according to analysis from Mozo.com.au.

Australian Bureau of Statistics (ABS) data released last week shows in the June quarter, the mean price of residential dwellings rose to $912,700. 

“Despite rising interest rates historically leading to a drop in housing prices, the cost of buying a home in Australia is becoming increasingly unaffordable,”  Mozo banking and rates expert Peter Marshall says, “and borrowers are now searching for more than $100,000 to cover a 20% deposit.”

A 20% deposit puts a borrower's loan to value ratio (LVR) at 80%, which is where interest rates start to become more competitive and the need to buy Lenders Mortgage Insurance (LMI) is removed. However, this standard 20% deposit is becoming increasingly out of reach for the average Australian.

HOW MUCH EACH STATE NEEDS FOR A 20% DEPOSIT

The ABS data shows NSW has been the hardest hit in terms of affordability, but the solution is not as simple as moving interstate. In all states and territories, borrowers need to find six figures to cover a 20% home loan deposit.

According to the ABS average earnings data, the pre-tax weekly earnings across  Australia is $1,838.10 per week, or $95,581 per year. That’s not even enough to cover a 20% deposit for a house in the cheapest state to buy property, the NT. 

In the NT, the average dwelling value ($521,700) is less than half that of NSW, borrowers are needing to find $104,340 to cover a 20% deposit. Based on the before-tax average earnings of $92,347 in the NT as of July this year, borrowers will need to save thousands more than their pre-tax annual income to cover that 20%.

*Based on ABS Average Weekly Earnings May 2023

In NSW, the average dwelling value now sits at $1,167,500, more than $200,000 more than the second most expensive state ACT. A whopping $233,500 is now needed in NSW to secure a 20% deposit, despite average earnings of $95,259.

NSW borrowers looking to avoid the cost of LMI and access lower interest rates associated with an LVR of 80%, will now need to save more than two times their pre-tax annual income.

IS GETTING A HOME LOAN WITH A 2% DEPOSIT RISKY?

Although there are options out there to get on the property ladder with a deposit as little as 2%, borrowers should be careful.  The Family Home Guarantee can help single parents and guardians buy a home with just a 2% deposit, but this could end up costing you in the long run.

“A 2% deposit may seem enticing,” Peter Marshall explains, “but a loan with a lower deposit will cost more in interest over the term of the loan, and higher LVR tiers associated with low deposit amounts can come with higher interest rates.”

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