With property prices continuing to rise in many areas, it’s natural to wonder just how much you need to save or how much deposit you need to buy a home.
This is always the first question almost every home buyer thinks of. The answer can vary depending on several factors, but understanding the basics can set you on the right path.
In most cases, the average deposit for a house ranges between 5% and 20% of the total purchase price. Yet, there’s more to consider than just the deposit amount. Factors like lender requirements, first-home buyer programs, and personal savings plans can all impact your home-buying journey.
Read this article, and find the answer to your question and gain the confidence you need to purchase your first home.
Understanding the Deposit Requirement
A deposit, also known as a down payment, is the initial amount you pay upfront when purchasing a house. Usually, it is stated as a percentage of the price paid when buying the property. The deposit serves as a sign of your commitment to the purchase and is essential for securing a mortgage from a home loan lender. Paying a larger deposit can help reduce your monthly mortgage payments and may allow you to secure better loan terms.
How much deposit do I need to buy a home?
The standard deposit percentage varies depending on the lender’s requirements. However, common benchmarks include:
A 20% deposit is frequently considered optimal when purchasing a home. It gives you access to the most reasonable mortgage rates and helps you avoid paying lenders mortgage insurance. This larger deposit tells lenders that you are financially reliable, which can lead to better loan terms.
A 10% deposit is also typical and provides a wider selection of mortgage alternatives at lower interest rates than a smaller deposit. It creates a balance between affordability and favourable credit terms.
A 5% deposit is the minimum some lenders will accept, but it usually comes with higher interest rates and stricter lending criteria. This lower deposit can limit your mortgage options and may result in higher overall costs.
Also Read: Can International Students Buy a House in Australia?
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Does the source of your deposit matter?
Absolutely, the source of your home loan deposit is important. Lenders are becoming more demanding about where your deposit originates from. This is mostly intended to analyse your overall financial soundness. Whether your deposit comes from personal savings, a gift, the sale of assets, or an inheritance, each source can have an impact on how lenders assess your financial health and ability to home loan repayment capability.
Clearly stating the origin of your home deposit is critical, as utilising funds from secret loans or unlawful sources might jeopardise your mortgage application while possibly resulting in legal consequences.
Other costs of buying a house
- Transfer Duty or Stamp Duty: Calculated based on the home’s value.
- Legal/Conveyancing Fees: Costs for legal services or conveyancing.
- Lenders’ Mortgage Insurance (LMI): Required if you borrow more than 80% of the purchase price.
- Registration of Title: Fees for transferring property ownership.
- Mortgage Registration Fees: Fees to register the mortgage with authorities.
- Home Loan Application Fees: Includes charges for independent property valuations.
- Reports: Fees for pest, building, or strata inspections.
Also Read:Â How much does it cost to build a house in Australia?
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Factors Influencing Deposit Amount
- Property Value:Â The property value has a considerable impact on the deposit amount. Higher-value properties necessitate greater deposits. To precisely figure out the deposit required, you must first understand the property market in the area of interest.
- Lenders Mortgage Insurance (LMI):Â LMI applies to buyers who cannot pay a 20% deposit. LMI protects the lender in the event that the borrower fails on the loan. However, it incurs an additional expense for the customer. The insurance premium can be paid upfront or added to the home loan amount, raising the total repayment cost.
- Government Schemes and Grants: Many governments provide schemes and grants to help first-time homeowners. These can greatly lower the deposit amount needed. For example, Australia’s first property loan scheme allows qualifying first-time buyers to buy a property with as little down payment without paying LMI.
- Market Conditions:Â Market conditions also influence deposit requirements. In a seller’s market, where demand exceeds supply, purchasers may need to provide bigger deposits to make their offers more competitive. In contrast, in a buyer’s market where supply exceeds demand, deposit amounts may be more flexible.
What if I have a smaller deposit?
1. Higher Loan-to-Value Ratio (LVR)
A smaller deposit results in a higher Loan-to-Value Ratio (LVR). LVR is the ratio of your loan amount to the property’s value. For example, with a 5% deposit on a $500,000 house, the loan amount would be $475,000, resulting in a 95% LVR. This higher ratio poses more risk for lenders and often leads to stricter lending criteria and additional costs for the borrower.
2. Lender’s Mortgage Insurance
When your deposit is less than 20% of the property’s value, you will likely need to pay LMI. LMI is an insurance policy that protects the lender if you default on the loan. This insurance can add thousands of dollars to your home purchase cost.
- Example: If the LMI is AUD 11,875, this amount is typically added to your mortgage, increasing the total loan amount you borrow. Thus, if your home loan is AUD 475,000 and the LMI is added, your total loan amount would be AUD 486,875.
3. Higher Interest Rates
Home Loans with low deposits usually have higher interest rates. Lenders charge these rates to compensate for the higher risk that comes with high LVR loans. Even a modest increase in interest rate can have a substantial impact on the loan’s overall cost over its life. For example, an extra 0.5% interest on a $475,000 loan can result in thousands of dollars in extra instalments over 30 years.
4. Increased Monthly Repayments
A low deposit means a higher home loan amount, which directly leads to higher monthly repayments. These larger repayments can strain your monthly budget and reduce your financial flexibility, making it harder to save for other goals or cover unexpected expenses.
5. Limited Loan Options
With a smaller deposit, your choice of loan products becomes limited. Some lenders have minimum deposit requirements or offer better terms and rates for loans with lower LVRs. This restriction can result in missing out on more competitive loan offers, which could further increase the cost of your mortgage.
Why a larger house deposit can be beneficial?
While it might be tempting to opt for a lower deposit, there are significant advantages to saving a larger amount:
1. Lower Loan to Value Ratio (LVR)
The bigger your deposit means LVR, which is the ratio of the loan amount to the property value. A lower LVR can lead to better loan terms, including lower interest rates and reduced mortgage insurance costs.
2. Reduced Mortgage Payments
A larger deposit means you’ll need to borrow less money, which leads to lower monthly mortgage payments. This makes your home loan more manageable and allows you to allocate funds to other areas of your life.
Example:
- If your Property Price is AUD 500,000, 10% Deposit of AUD 50,000, and Loan Amount of AUD 450,000. Your Estimated Monthly Payment will be AUD 2,000.
- If your Property Price is AUD 500,000, 20% Deposit of AUD 100,000, and Loan Amount of AUD 400,000. Your Estimated Monthly Payment will be AUD 1,800
In this example, a larger deposit lowers the monthly payment by AUD 200, making it easier to budget and manage other expenses.
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3. Increased Home Equity
A bigger deposit boosts your home equity from the start. Home equity is the gap between the property’s current value and the outstanding loan balance. Higher equity can provide a buffer against market fluctuations and offer more financial flexibility.
4. Competitive Advantage
In a competitive housing market, a larger deposit can make your offer stand out to sellers. It demonstrates financial stability and increases your chances of securing the property.
Is it possible to buy a property with no deposit?
If you find yourself in a situation where you don’t have a deposit but are eager to buy a home, there are several strategies and programs that might help you.
Guarantor Loans
A guarantor loan allows you to borrow the entire value of the property while someone (usually a family member) serves as your guarantor. The guarantor covers the loan by pledging their own personal property or finances as collateral.
How It Works:
- Guarantor Role: The guarantor’s property or savings will back your loan, lowering the lender’s risk and maybe allowing you to avoid the need for a deposit.
- Benefits: Helps you get into the property market without a deposit and may offer better loan terms compared to high LVR loans.
- Risks: The guarantor is liable for the loan if you default, and their own assets are at risk.
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First Home Owner Grants
First Home Owner Grants (FHOG) are government programs designed to help first-time home buyers by providing a cash grant that can be used towards the purchase of a new home. These grants aim to make homeownership more accessible, but the eligibility criteria and grant amounts can differ depending on the region.
How It Works:
- Eligibility: To qualify for the FHOG, you must be a first-time home buyer. You cannot apply as a company or trust. Additionally, at least one applicant must be a permanent resident or an Australian citizen. If you meet these conditions, you may be eligible for the grant.
- Benefits: The grant provides a lump sum amount of money that can be applied towards a down payment or other expenses related to purchasing a property.
- Limits: As per revenue.nsw.gov.au, a $10,000 FHOG is available for those buying or building their first new home. The purchasing price of the property must not exceed $600,000, and the total value of the property, including house and land, must not exceed $750,000.
Also Read:Â First Home Buyer Schemes and Grants Available in Australia 2024
Shared Equity Schemes
Shared equity schemes involve purchasing a property with a government agency or private organisation. Under this program, the NSW Government can contribute up to 40% of the purchase price for a brand-new home or 30% for an existing dwelling. This major contribution can significantly lower the amount you need to borrow and reduce the deposit requirement to as little as 2% of the purchase price.
| Notice:
The Shared Equity Home Buyer Program ended on June 30, 2024. If you have received pre-approval before that date, you have until September 30, 2024, to purchase a home. No additional pre-approval extensions will be granted after June 30, 2024. Current participants will continue to get assistance and must follow program guidelines as long as they own their house. |
To participate in the Shared Equity Scheme, you have to show that you are capable of managing a mortgage with government assistance. You should also demonstrate that you would be unable to obtain a mortgage without this support. Finally, you must fulfil the program’s eligibility standards.
The Bottom Line
Determining the right deposit amount is an essential first step in the home-buying process. You can make better financial decisions and be more prepared if you understand the minimal criteria, the impact of LVR, and alternative ways for getting your deposit. Whether you go for a normal 20% deposit to avoid LMI or look for a small deposit option, careful planning and use of available tools and schemes will put you on the route to house ownership in Australia.
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