How Much Deposit Do I Need For a Home Loan?

Your deposit is one of the most important parts of your home loan application and the more money you can put towards your loan, the lower your repayments, fees and interest will be.

Lenders all have different criteria for assessing deposits, but as a rule, the more you’ve saved, the better the chance that your mortgage broker can negotiate you a lower interest rate or have fees waived.

If you are buying a home that you plan to live in, the standard deposit required is 20% of the value, which is what you’ll need to put down to avoid paying Lenders Mortgage Insurance (LMI).

But there are ways to pay a lot less deposit or in some cases no deposit at all and here we look at these in more detail, along with ways to fast track your savings.

What are genuine savings?

Genuine savings are regular savings you have had in your bank account for at least three months. Lenders use genuine savings as a tool to see if you can demonstrate a pattern of saving, amongst other criteria.

For most lenders, genuine savings have to make up at least 5% of your deposit, but it depends on the lender, as some will consider other sources such as equity, stocks, investments, tax refunds, inheritance or monetary gifts as fulfilling the criteria of genuine savings.

What is Lenders Mortgage Insurance?

If your deposit is less than 20% of the property’s value, you’ll incur a fee called Lenders Mortgage Insurance (LMI). This protects the lender if you're unable to repay your loan and the sale of the property doesn't cover the outstanding loan balance.  

Lenders Mortgage Insurance can be included either in your upfront costs or absorbed into your repayments and spread out over the term of the loan. The cost of LMI can be up to 3% of your home loan amount, which is a sizeable chunk, so it’s easy to see why borrowers would want to avoid this charge by having a deposit of at least 20%.

What else do lenders look for?

As well as an acceptable deposit, lenders look for several other criteria when assessing you for a mortgage including;

  • Stable employment – you must have been in your current job for at least six months to one year.
  • Good income – you must have enough money coming in to be able to comfortably service the loan.
  • Clean credit history – you must have no black marks on your credit file and have paid all your bills on time for the last six months.
  • Minimal debts – you should not have more than 7% of the property’s value tied up in unsecured debts such as personal loans and credit cards.
  • Good asset position – you should be in a good asset position relative to your age and income.

What are the advantages of a larger deposit?

There are a number of advantages to having a larger deposit. For one thing, you won’t have to pay Lenders Mortgage Insurance (LMI) as already mentioned.

Also, the larger your deposit, the faster you’ll pay off your loan and the less you’ll pay in the long run. This is because the more you bring to the table, the less you have to borrow, which means lower regular repayments and less interest over the lifetime of the loan.

A larger deposit may also allow you to negotiate a discounted interest rate from a lender. That’s because the larger the deposit, the less risk you represent to them, which puts you in a better position to negotiate a good deal.

A larger deposit can also give you access to a wider selection of loans, which means you could save even more in the longer term.

What if I don’t have a deposit?

With property prices rising steadily and some first home buyers beginning to wonder if they’ll ever be able to get a foothold in the market, the question for some is not how to get a big enough deposit, but how to scrape together a deposit at all.

Fortunately, there are some options for borrowers without a deposit including;

  • Guarantor - you may be able to have a parent or immediate family member with equity in their property go guarantor for you as security for a loan. You would then be able to borrow up to 105% of the property’s value without the need for a deposit (other than the 5% genuine savings which may still be required).
  • Low-risk occupation – not many people know that if you belong to a profession such as an accountant, engineer, financial planner, lawyer or medical practitioner you may be eligible for a special home loan where you don’t pay LMI and may even receive a discounted interest rate.
  • Deposit Protect Bond – this allows you to make a purchase while your deposit is pending. While it’s not a substitute for a deposit, it can be useful at auctions when your cash is temporarily tied up in other investments.

How can I fast track my deposit?

If you aren’t in a special occupation and your parents aren’t in a position to go guarantor for you, then the following are some useful tips on fast tracking the deposit you’re going to need to get into your new home;

  • Saving – it might sound old-fashioned, but you’d be surprised how much you can accumulate by putting some money every week into a high interest bearing account.
  • Budgeting – forego all of life’s little luxuries including holidays, new cars and restaurant meals and pour everything into your savings for a deposit.
  • Debt consolidation – roll all of your personal loans and credit card debts into one low interest loan and pay it off as quickly as you can. This will also help you with lenders when it comes time to apply for your home loan.
  • First Home Owners Grant (FHOG) – first home buyers may be eligible for a one-off tax-free payment which can be used towards your deposit.
  • First Home Saver Super Scheme - allows first home buyers to sacrifice a portion of their salary to top up their super and then withdraw the deposit for a home loan.

Where can I get advice?

At the end of the day, some borrowers may never be able to get a 20% deposit together and may be forced to try and get into the market on a minimum deposit, even if it means paying LMI and copping a higher interest loan over a longer period.

But you should always talk to your mortgage broker first, as they have the industry experience to know where the exceptions lie and which lenders may be more sympathetic to the plight of the first home buyer.

It’s a free service and with over 500 mortgage brokers throughout Australia, chances are Loan Market has someone just around the corner ready to help you.

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