How much do I need for a deposit?
If you’re ready to start saving, first you’re going to need a figure in mind to strive toward. This part can be pretty daunting. We seem to hear ad nauseam about the sky-high price of property in Australia and how hard it is for first home buyers to save the requisite 20% deposit to get into the market. It can make saving a deposit seem like an impossible feat.
But it can be done.
How much deposit do I need to get a home loan? A quick summary
Your deposit needs to be:
- 5 - 20% of the property purchase price for regular borrowers
- 20 - 40% for low doc borrowers
For a $300,000 home, a hypothetical deposit might need to be between $15,000 (5% deposit) - $60,000 (20% deposit) depending on the loan.
|House price||5% deposit (95% loan)||20% deposit (80% loan)|
|Lender's mortgage insurance||LMI required||LMI not required|
Here’s the good news about deposits:
You might not have to save quite as much as you think. Some lenders are willing to lend you up to 95% of the purchase price of the property. This means you only need to come up with a 5% deposit. Not quite as frightening as that dreaded 20% figure, is it?
OK, here’s the bad news:
That deposit isn’t the only cost associated with getting a home loan. First of all, it’s likely you’re going to have to pay stamp duty. Stamp duty is a state-based tax on the sale of big ticket items like vehicles and property.
On a major purchase like a home, stamp duty can add up to tens of thousands of dollars. In fact, a recent CoreLogic study found that to buy a Sydney house at the more affordable end of the market first home buyers would have to save $59,033 for stamp duty and a 5% deposit.
A bit more bad news:
If you take out a home loan with less than a 20% deposit, you’ll have to pay what’s called lenders mortgage insurance (LMI). LMI is an insurance policy that protects your lender in case you default on your home loan. This, too, can add thousands to the cost of a home loan.
So, taking all this into account, how much do you actually need to save for a home loan deposit? The first step is to figure out how big a home loan you can comfortably afford. To do that, you can put your income and expenses into the borrowing calculator below. That will give you a rough guide to how much you might be eligible to borrow.
Now that you’ve got a decent idea of the size of a home loan you’ll be able to take on, let’s work backwards to figure out the price range. So, for example, if the calculator tells you you’re probably able to afford a home loan of $500,000, to figure out how big a deposit you need to save, let’s look at a few different scenarios.
Say you want to avoid paying LMI. This means you’ll need a 20% deposit, so the $500,000 you’re borrowing will be 80% of the value of the property. We’d work it out like this:
Example #1 - How to work out a 20% deposit
$500,000 ÷ 0.80 = $625,000
$625,000 - $500,000 = $125,000
So a 20% deposit would be $125,000. On top of that, you could be paying stamp duty, depending on where you live. Different states and territories have different rules around stamp duty and many offer concessions to first home buyers. You can read all about it in our guide, but you can also use the stamp duty calculator below to figure out how much you’ll have to pay:So, let’s assume you live in New South Wales. Inputting the purchase price into the calculator, it shows you’d be liable for $18,883.50 in stamp duty. Add this to your $125,000 deposit and it means you’d need to save $143,883.50.
This probably seems pretty steep. So what if you decide instead to save up a smaller deposit and pay for LMI? If your borrowing power is $500,000 and you want to pay a 5% deposit, that means you’ll be borrowing 95% of the purchase price of the property:
Example #2 - How to work out a 5% deposit
$500,000 ÷ 0.95 = $526,316.
$526,316 - $500,000 = $26,316
Looking at the example above, the price range you’d be buying in has dropped significantly, but so has the required deposit. Once again, we’ll have to factor in stamp duty using the calculator above. The good news is, if we go by our previous example of a buyer in NSW, they wouldn’t have to pay any stamp duty on a property in this price range so long as it’s a newly-constructed home.
With this smaller deposit, though, also comes the burden of LMI. Genworth, one of the LMI providers in Australia, has a handy calculator you can check out which will provide you with an estimate of the LMI payable on different size home loans.
The good news about this is that you don’t have to pay this all in one go. It can be capitalised on your loan and you’ll pay for it with your regular home loan repayments. However, this will add a bit to your repayments. In the example we used above, you’d be looking at an additional $84 per month on top of your regular home loan repayment.
Now, there are a few other things you might want to budget for. Buying a house isn’t as simple as writing a cheque for your deposit and stamp duty. You’ll also have to pay for building and pest inspections, solicitor’s fees and removalists. This can easily run you an extra $3,000 or $4,000 (or more, depending on how far you’re moving).
What have we learned?
If you’re willing to pay for LMI, the size of the deposit you’ll need can be substantially smaller. It’s still a pretty hefty figure for most of us and it can be discouraging trying to get started, but in the next section we’ll tackle some of the other sources you might be able to use to supplement your savings.
Other parts in this guide
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