How much deposit do I need to buy a house in Australia?
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Owning a home is a dream for many Australians and it’s a significant life achievement. But how much exactly do you need to step onto the first rung of the property ladder?
It’s generally standard to put down a 20% deposit on a home, which helps you avoid additional fees. However, for many people – especially people living in urban or high-cost-of-living (HCOL) areas – a 20% deposit may feel out of reach.
Don’t be discouraged. There are other options, including government schemes, the bank of mum and dad, and lenders who will accept deposits as low as 5%, although this might mean paying some extra fees.
In this article, we are going to help you understand your mortgage options so you can purchase your first property sooner. We’ll also share what you need to know about saving for a deposit so you’re ready to start building towards your first home.
How to figure out your budget and deposit
The cost of your deposit will vary depending on where and what you are looking to buy. For example, if you are choosing to live in a major city like Sydney, you’ll likely need a larger deposit or opt for a smaller dwelling like a townhouse or apartment.
What can you afford?
Before scrolling through real estate sites, it can help to understand what your borrowing power is. Here are a few factors that will affect it.
Income: What mortgage can you afford to service? Typically these figures are shown in a monthly payment.
Expenses: How much do you spend to sustain your lifestyle? Think about regular expenses like groceries, power, internet, and insurances. Also factor in the expenses that fulfil you, such as hobbies, sports, travel, a gym membership, or subscriptions.
Existing debts: Do you have debt or personal loans? Do you regularly make payments on time? Lenders will look at your debt-to-income ratio (DTI) and your repayment history as part of your application.
Credit score: What’s your credit score? A high score could prove you are a trustworthy borrower, which could work in your favour. However, if you haven’t been consistent in making payments on time, this could affect your application.
To understand your estimated borrowing power, use a repayment calculator or mortgage calculator to help you get a better understanding of where you’re currently placed. If you want further advice, speak with a financial adviser for guidance.
Deposit options and their impact
The deposit you save directly impacts your loan, monthly repayments, and whether you’ll need Lenders Mortgage Insurance (LMI). Here are the most common deposit amounts and how they affect your mortgage.
20% deposit
If you’re able to put down 20% of the property's value as a deposit, lenders will see you as a low-risk buyer. You'll find it easier to get a mortgage and you won’t incur LMI costs. However, this deposit might not be realistic for everyone and long-term savings may be required to achieve it.
10% deposit
Putting down 10% of the property's cost will mean you’ll need to borrow 90% from a lender. Due to this, you will likely need to pay for Lenders Mortgage Insurance (LMI), which will be added to your loan and lead to higher monthly payments.
However, if you are a first-time home buyer, you might be able to access the government scheme First Home Guarantee, which waives the LMI costs. This will allow you to jump into the property market faster with less savings.
5% deposit
Five-percent is usually the lowest deposit a lender will allow. With this modest deposit, you’ll be able to buy a home sooner. If this is your first home, you may have access to government schemes like the First Home Guarantee, which lets you put down a 5% deposit and avoid LMI.
If you’re looking at a house or unit that costs $200,000, that means you can buy a house with a $10,000 deposit. However, since you will still be borrowing a large portion of the cost to buy your home, you’re likely to have higher monthly repayments.
0% deposit (guarantor loan)
If you have someone (typically a family member) willing to guarantee your loan by using their home equity as security, you may be able to buy with no (0%) deposit.
The positives of buying with a guarantor are that you might be able to enter the property market sooner, even if you don’t have a deposit saved. Since this covers the risk from the lender’s perspective, you might also not need to pay LMI if your guarantor covers at least 20% of your loan.
However, the guarantor’s property is at risk if you default on your loan. It can also affect their ability to borrow in the future, so if they are in the market to buy another property, they will need to consider this.
Here’s a simple table to help you compare the various deposit amounts.
Note: All estimates in this section are approximate and based on a standard 6% interest rate, which will fluctuate. The actual rates and repayment amounts will also vary depending on who your lender is, the loan type, and your individual financial circumstances. If you have questions, seek professional financial advice.
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) is an additional cost that is added to your loan if your deposit is less than 20%. It adds protection for the lender, in case you default on your loan.
It’s important to understand that LMI is for the benefit of the lender, not you. If you can’t make your payments, you’ll still be liable.
“LMI is a one off fee that is usually capitalised into the loan – meaning it will slightly inflate your loan amount and repayments – which is essentially paid off during the life of the loan. For client’s adverse to LMI, it’s important to weigh up the opportunity cost not purchasing the property due to LMI and saving for the extra 6-12 months, VS paying LMI with the view that the capital growth in owning the property now rather than 6-12 months will appreciate and far outweigh the small LMI fee.” said Fane Levy, Senior Credit Adviser for Shore Financial.
The cost of your LMI will depend on how much you borrow and your deposit amount. The smaller your deposit, the higher the cost of your LMI.
To give you a rough estimate, Canstar states that for a $600,000 home in Australia, this is what you can expect:
5% deposit ($30,000): LMI is approximately $31,008.
15% deposit ($90,000): LMI is around $5,100.
Your LMI is usually a one-time payment; you can pay it in cash, or it can be added to your mortgage.
If you secure the first First Home Guarantee from the government or use someone as a guarantor, you can usually avoid paying LMI, even if you have a deposit under 20%.
Additional costs to consider
The cost of owning a home may seem daunting, especially to first-time buyers, but information is your friend. If you have a clear idea of the costs you’re likely to face (in addition to the house purchase), you can budget accordingly.
Four upfront costs for home buyers
There are upfront costs you’ll need to pay before you move in. Here are four to be aware of.
1. Stamp duty
This is the tax you need to pay the government when you buy a house. The more expensive the house is, the more stamp duty you’ll need to pay. In some cases, first-home buyers will be exempt from this. A stamp duty calculator can help you determine the amount you’ll need to pay.
2. Legal fees
When buying a house, you need a lawyer or conveyancer to make sure the sale of the house is correct and legal. They also handle all contracts, transfers, and legal checks, which makes the process smoother for both the buyer and seller.
3. Building inspection
To put it bluntly, you don’t want to buy a lemon. It’s essential to have your own independent inspector provide a building report on the property. A building inspector will assess every aspect of the property to make sure it’s as good as advertised. After they present their findings, you can determine whether or not you want to continue with the purchase. At least you’ll know exactly what you’re signing up for.
4. Loan application fees
Some banks will charge a one-time setup fee when you take out a home loan. This might not always be the case, so make sure to shop around to find the right bank for you before settling on your lender.
Ongoing costs for homeowners
Once you have your home, there are additional financial obligations you’ll need to prepare for.
Council rates
This is the annual fee you need to pay the local council to help them upkeep the services you enjoy in your home, such as rubbish collection, roads, pipes, and more.
Home insurance
You’ll want to ensure your home is properly insured to protect your investment. Home insurance will protect your property from disasters like fires and storms. Contents insurance will protect your belongings from theft and damage. Not only is it a smart thing to have, but your lender will often require you to have at least home insurance as a condition of your mortgage.
Six tips to help you save for a deposit
If saving for a deposit feels overwhelming, break it down into achievable steps. By staying consistent and sticking to your plan, you can start to put together a strong deposit. Other people have done this – you can, too.
Realistically, you may need to make some short-term changes for the long-term homeownership picture. However, there are ways you can save for a deposit that doesn’t involve sacrificing everything that makes life enjoyable.
Here are six tips to help you save for a home deposit.
Be clear on your deposit goal. Run the numbers and work backwards from there, determining what you need to save monthly in order to achieve your goal.
Don’t see the money. Have an automatic payment go out of your account into a high-interest savings account straight after you're paid. This might sound strange, but it’s effective – if you pretend you don’t have that money, you won’t be tempted to spend it.
Find cheaper accommodation (or a flatmate). This doesn’t have to be long-term – it’s amazing what you’ll be able to save in a year or two by reducing rental costs.
Pay off your debt first. Credit card debt and personal loans will give you less borrowing power, so it’s best to squash them first. In addition, the faster you can pay off your debt, the more you’ll save on interest payments.
You shouldn't put your life on hold to save for a deposit, but if you are spending a lot on travel, online purchases, or outings, try to scale back while you save. Again, if you can tighten spending for a year or two, it makes a big difference.
If you can, take on some freelance work, overtime, or a side gig, and put the extra money into your savings.
Summing up
Saving for your goal of home ownership is an exciting time, and you should be proud that you're taking actionable steps towards your goal by actively saving for a house deposit. Understanding your options and following a plan will make buying a house easier and you’re likely to be able to achieve your home ownership dreams sooner, whether you have the 20% or are looking to take advantage of the low-deposit schemes.
There are multiple ways you can buy property and you don’t have to do it alone. If you’d like expert advice on reaching your homeownership goal, DiJones is here to help. Reach out today, and we will help you navigate the world of deposits, mortgages, and beyond.
FAQ
Is there any government support for first-time buyers?
Yes, the Home Guarantee Scheme (HGS) has two programs in place to support eligible first home buyers.
The First Home Guarantee allows first home buyers to pay a 5% deposit and avoid LMI cost.
The Regional First Home Buyer Guarantee offers specific support to buyers in the regions.
Some Australian states may provide a First Home Owner Grant (FHOG), which is a one-time grant to eligible first-home buyers. They are state-specific, so make sure to check what your state is offering.
There is also the Family Home Guarantee, which helps single parents with a 2% deposit to get them into a stable home. Applicants can be either first home buyers or previous homeowners (conditions apply).
Check your eligibility for these home owner grants.
Can I buy a house with a $10,000 deposit?
Yes. You can buy a house with a $10,000 deposit, but it will come with more challenges than if you had a 20% deposit saved up. For most homes, a $10,000 deposit would be under the minimum 5% you’d typically see lenders agree to. However, with support from a guarantor or a government scheme, and depending on the type of property you’re looking at and the region you’re looking to buy in, you might be able to buy a house with a $10,000 deposit. Another option is to team up with a sibling, partner or close friends to boost your deposit.
Are there ways to increase my borrowing power?
Potentially. If you have existing debts you’ll want to pay them off before applying for a mortgage. You’ll also want to reduce your credit card limits, increase your savings, and ensure you have (or are building) a high credit score. All of these actions give lenders faith that you will be able to pay back your mortgage.
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