Buying a house in Australia requires a significant amount of money upfront. Saving up for a deposit is one of the biggest challenges for many people looking to enter the property market.

So, how much do you need to save? Typically, lenders expect you to save between 10% to 20% of the property’s price. For instance, if a lender offers a ‘loan-to-value ratio‘ or ‘LVR’ of 90%, you’ll need at least a 10% deposit. If it’s an 80% LVR, you’ll need at least a 20% deposit.

According to the ANZ CoreLogic Housing Affordability Report, it takes an average household 11.3 years to save for a deposit on a home loan. In major cities, this time can vary slightly, with Sydney topping the list at over eight years to save a 20% deposit for an entry-level home.

While it might be tempting to opt for a home loan with the lowest deposit requirements to buy a home sooner, this can come with its own drawbacks, which we’ll discuss later on.

Lenders Mortgage Insurance – LMI Explained

Lenders Mortgage Insurance (LMI) is something you might need to pay if your home loan deposit is less than 20%. This insurance protects the lender in case you can’t repay your loan.

For example, if you put down $70,213 as a deposit on a home, you’d have to pay LMI to your lender.

The two main providers of LMI in Australia are QBE and Helia Group (formerly Genworth).

LMI might seem like an extra cost, but it’s there to cover the lender because they see borrowers with smaller deposits as riskier. So, while a smaller deposit might help you buy a home sooner, remember that LMI adds to the overall cost.

How much does LMI cost?

Using the median property price of $702,136, if you have a 10% deposit, you’d pay about $12,638 in LMI upfront.

With a 15% deposit (85% LVR), the LMI premium would be around $5,968.

When you’re applying for a home loan, there are other costs to think about too:

• Legal fees for conveyancing
• Stamp duty
• Inspections for pests and building quality
• Insurance for the building
• Fees for setting up and registering your loan

So, if you’re a first-time home buyer, check if you qualify for any stamp duty exemptions or rebates in your state or territory. It could save you some money.

What are the factors that can affect your loan and interest rate?

Several factors can impact your loan and interest rate. One of the main ones is your credit score, which shows how reliable you are as a borrower. Basically, it’s based on your credit history, including past and current loans, credit cards, and how punctually you pay your bills.

Lenders often offer lower rates to borrowers with higher credit scores. For example, if you regularly pay your bills on time, you’re likely to have a high credit score, making you less risky to lenders.

Conversely, if you often miss bill payments or don’t manage your debts well, your credit score may be lower. Lenders see this as a higher risk, which could mean a higher interest rate or even difficulty getting a loan.

Another crucial factor is your savings habits. Lenders look favorably on borrowers who show they can save consistently. This demonstrates your ability to handle a loan and make repayments regularly. You can build up your savings by putting money aside weekly, every two weeks, or monthly. This shows lenders you’re financially responsible and capable of managing a loan.

Why does the size of your home loan deposit matter to lenders?

Lenders generally prefer home loan applications with a bigger deposit for three main reasons:

Interest rates: A larger deposit can affect the interest rate you’re offered on your new home loan. With a bigger deposit, you might have more options and could even get a lower interest rate.

Less interest to pay: When you borrow less money from the lender, you’ll have less to pay back overall, including less interest. A larger deposit can save you money in the long term.

Lenders mortgage insurance (LMI): If your deposit is less than 20% of the property’s price, you’ll likely have to pay LMI because lenders see you as a higher risk. Having a deposit larger than 20% means you won’t need to pay LMI.

A larger deposit can give you better options for interest rates, reduce the total amount you repay, and avoid extra costs like LMI.

Pros and cons of your home loan deposit size

Pros of smaller deposits:

Quicker to save up for a deposit.

Opportunity to enter the market sooner, although past performance doesn’t predict future trends.

Cons of smaller deposits:

Lenders Mortgage Insurance (LMI) is often required, typically costing 2-4% of the property price.

Some lenders may charge higher interest rates for loans with high Loan-to-Value Ratios (LVR).

Pros of larger deposits:

No need to pay LMI, which can save you thousands of dollars or 2-4% in insurance costs.

You borrow less, potentially saving thousands in interest and having lower monthly repayments.

Cons of larger deposits:

It takes longer to save up, during which time property prices could continue to rise.

In major cities, saving for a ‘starter’ home deposit often takes more than five years.

Ultimately, deciding how much to put towards your home loan deposit is a personal choice. It’s a balance between patience, convenience, and costs.

How can you improve your chances of getting approved for a loan with a smaller deposit?

If you’re aiming to buy your first home but are concerned your deposit isn’t big enough, you can still qualify for a home loan.

If your deposit is between 10% and 20%, here are some steps to enhance your approval chances.

Here are 4 steps to help you achieve your dream home:

Start saving early: Save consistently to demonstrate to lenders that you can budget and responsibly manage your finances. It shows your commitment to building your deposit.

Pay off debts: Clear any outstanding debts like car loans or credit card bills. Lowering your debt load improves your chances of loan approval and increases your borrowing capacity.

Maintain a good credit score: Pay your bills on time and manage your debt effectively. A high credit score reassures lenders that you’re a reliable borrower.

Cut expenses: Review your expenses and reduce unnecessary costs. Lowering your living expenses improves your ability to borrow by showing you can manage your finances efficiently.

What if I’m struggling to save for a home loan deposit?

If you’re finding it tough to save for a home loan deposit, there are options to assist you:

First Home Owner Grant: First home buyers can apply for this grant, which offers a cash boost of $10,000 to $30,000 depending on your state or territory. This money goes towards your deposit.

First Home Buyer Guarantee Scheme (FHBG): This scheme lets first home buyers purchase a home with a deposit as low as 5% without needing to pay the Lender’s Mortgage Insurance (LMI). The government guarantees part of your loan, making it easier to borrow up to 95% of the property’s value. Variants include the Regional First Home Buyer Guarantee and the Family Home Guarantee.

Family Home Guarantee: This helps single parents with dependents to buy a home with a deposit as low as 2%, also without needing LMI.

Guarantor support: If you’re struggling, a family member can act as a guarantor by using their property’s equity as security instead of a cash deposit. The guarantor is legally responsible for mortgage repayments if you can’t make them. You can apply to remove the guarantor once you’ve paid off part of the loan or the property’s value has increased.

If you’re ready to explore these options and get pre-approval for your home loan, talk to one of our home loan experts today to determine your deposit requirements and start house hunting. So, why wait? Book a consultation call at 1300 GET LOAN today!

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