How much do I need for a home loan deposit?
You need a deposit worth at least 5% of a property's value to get a loan, but there are other upfront costs too, including lenders mortgage insurance, stamp duty and legal fees.
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Ideally, banks and lenders like borrowers to save at least 20% of a property's purchase price as a deposit when approving your loan. But that's a lot of money – and a 20% deposit is an amount that some borrowers will be unlikely to save, especially once you budget for other costs like stamp duty and legal fees.
If you're able to pay the extra cost of lenders mortgage insurance (LMI) or you're a first home buyer eligible for the First Home Loan Deposit Scheme, then you could buy a property with just a 5% deposit.
A smaller deposit means you have to borrow more money, which increases your monthly home loan repayments. However, this could be a small price to pay in order to get on the property ladder sooner.
Deposit sizes explained
For a $500,000 home, a hypothetical deposit is likely to be between $25,000 (5% deposit) and $100,000 (20% deposit).
A low deposit home loan can help you get your dream home faster. But the catch is the extra cost of lenders mortgage insurance.
If your deposit size is anything under 20% you will generally have to pay LMI, which can add thousands of dollars to the cost of buying a home.
|House price||5% deposit (95% loan)||10% deposit (90% loan)||20% deposit (80% loan)|
How do I work out how much to save for a 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 let’s work backwards to figure out the price range. Let's imagine your borrowing power suggests you can afford a loan of $500,000. What would a deposit look like?
Example 1: 20% deposit
- $500,000 ÷ 0.80 = $625,000
- $625,000 - $500,000 = $125,000
Example 2: 5% deposit
- $500,000 ÷ 0.95 = $526,316.
- $526,316 - $500,000 = $26,316
So a 20% deposit would be $125,000 but a 5% deposit would be $26,316.
Don't forget to add stamp duty costs
Stamp duty can add tens of thousands of dollars in costs along with your deposit. Luckily, there are stamp duty concessions and discounts for buyers in most states if you are buying your first property and it's a house to live in.
Different states and territories have different rules around stamp duty and many offer concessions to first home buyers.
You can also use the stamp duty calculator below to figure out how much you’ll have to pay.
Let’s assume you live in New South Wales. When you type $625,000 as the purchase price into the calculator, it shows you’d be liable for around $23,615 in stamp duty if you're not a first home buyer. If you are a first home buyer, you pay nothing in stamp duty. If you're an investor, the amount of stamp duty payable may be even higher.
There are a few other cost you may need to budget for, too, such as building and pest inspections, solicitor's fees and removalists costs. This can cost up to $3,000 or $4,000 (or more, depending on how far you're moving).
Is it worth paying LMI to buy a property sooner?
The extra cost of lenders mortgage insurance varies depending on your property's value and the amount you've saved. 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.
Here are a few example calculations (keep in mind these are only estimates and may not reflect the figure you will be liable to pay):
|House price||5% deposit||LMI estimate|
Expert tips to help you buy a home with a low deposit
Susan Mitchell, CEO of Mortgage Choice, shares her expert insights for those who are keen to try and buy a property with a low deposit:
- Work out what size deposit you will need for the type of property you want to buy. "This will be your goal. It can be helpful to come up with a savings plan and timeline to achieve your goal so you have something to work towards. I recommend first time buyers to keep their savings in a separate bank account so that you resist the urge to spend it."
- If you have to pay LMI on a low deposit loan, you don't have to pay it all up front. "The amount may also be added or capitalised to your loan amount, which means you will end up paying more interest over the life of your loan. If you have enough money saved to pay LMI upfront, you may be better off contributing it to the deposit amount and paying a smaller LMI premium."
- Know the risks of a low deposit loan. "The worst case scenario is if there is a significant fall in property values and you are unable to pay back your home loan and are forced to sell your home, you may not be able to recoup enough funds to repay the debt you owe." To boost your deposit and lower this risk, check out these home deposit saving tips.
Can you buy with a 5% deposit and avoid paying LMI?
The federal government's First Home Loan Deposit Scheme lets eligible first home buyers purchase homes with just a 5% deposit saved. The government in effect guarantees a further 15% of your purchase, meaning you can avoid LMI while borrowing 95%. This can save borrowers thousands in LMI costs.
Learn more about the First Home Loan Deposit Scheme and find out if you are eligible.
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