Home loan deposits - a complete guide for home buyers
Your very first step on the path to owning a home will probably be saving towards a deposit for a home loan, which can be a daunting prospect without the right information to guide you. One of the most commonly asked questions is “how much deposit do I need to buy a house?”, followed closely by “can you buy a house without a deposit?” Here, we take a good hard look at the world of home loan deposits to help you understand what they are, how they work, and whether you need one or not.
What are home loan deposits?
As the term suggests, they are a lump sum of money that you lay down as a deposit on the full price of a property that you will be buying with the help of a financial institution. The money you provide for a deposit constitutes your initial contribution towards the purchase of your new property and reduces the amount that you have to borrow from your lender to meet the full purchase price.
Buying a house without a deposit
These days, it is pretty much impossible to get a 100% home loan unless you have a guarantor or serious equity in another property.
Guarantor
In Australia, a guarantor is often the buyer’s parents, who put up their own home as security for a loan. Although you may find some exceptions, most lenders will require the guarantor to be working and have enough equity in a property located in Australia to cover the loan in case of default. If you do have a guarantor who is willing and able to help you, you may be able to get a loan for up to 105% of the property purchase price.
Equity
This will only be available to you if you already own a property and have sufficient equity in it to cover the cost of a deposit or guarantee the whole loan. As with all financial decisions, it is essential to discuss these and any other options with your financial advisor or accountant before moving forward. To talk to Shore Financial about your home loan options click here.
I don't have a guarantor or equity in a property. How much deposit do I need to buy a house?
Most lenders will require potential borrowers to contribute around 20% of the purchase price of the property they are hoping to get a home loan for.
So, for a home that costs $1 million, you will need to save at least $200,000 before you approach a lender for the remaining $800,000. We say “at least” because you will also have to save enough to cover stamp duty fees, conveyancing fees, application fees, registration of your mortgage, and transfer of the property title.
This might seem steep, but it partially protects the lender in case of default. It also reflects on a borrowers’ ability to keep up repayments over the lifetime of the mortgage, making it more likely that they will get that loan.
One good way to get an idea of how much you will need to buy your home is to consult an online calculator like the DiJones borrowing calculator, which will check your borrowing capacity in just 90 seconds.
What happens if I don't have a 20% deposit?
Not all is lost! Although most lenders will expect you to contribute between 10% and 20% of the purchase price, some will accept as little as a 5% deposit, depending on the property and other factors, such as your credit history.
There are also several schemes in place to help first-time homebuyers take that first step onto the property ladder. For example, the First Home Guarantee Scheme allows eligible buyers to apply for home loans with a 5% deposit while the government guarantees the remaining 15% of the purchase price. In the case of single-parent families, this is reduced to a 2% deposit, with 18% guaranteed by the government.
Because of the government guarantee, the risk to lenders is the same as when a buyer provides the full 20% deposit, so it is worth checking to see if you are eligible for one of these schemes.
You can read more about these guarantees on this government website.
How does my lender work out how much deposit I need?
There are several different factors that a lender will take into account to calculate how much deposit you will have to pay. Besides checking to see if you have a guarantor or equity in a property, they may want to see proof of:
- Genuine savings, which are regular amounts paid into an account for at least 3 months with no withdrawals during that time.
- Your 12-month rental ledger, especially if you are seeking a loan as an owner-occupier.
- Term deposits or shares held for a minimum of 3 months.
- Any inheritances or gifts of money if they are held in an account for at least 3 months. In the case of gifts, they may require written proof that the amount was not a loan to be returned at any time.
- Of course, you will need to speak to your lender about your particular circumstances, as every institution is different and may require different evidence of your ability to pay off a loan. To talk to Shore Financial about how much deposit you will need click here.
Is it worth providing a bigger deposit?
A higher deposit will bring all kinds of advantages with it. The most obvious one is that the more money you contribute from your own savings, the less you will have to borrow from your financial institution, meaning savings on interest in the long term. But there are more benefits!
With a larger deposit, you are likely to have your choice of lenders and access to a greater variety of loans and financial products that might bring down the long-term cost of your home.
You might also find yourself able to ask for a bigger loan or even a more competitive interest rate. Lenders appreciate trustworthy borrowers, and proving you can save hard will strengthen your hand in the borrowing process.
Finally, you may be exempt from having to pay Lender’s Mortgage Insurance (LMI), saving you a lot of money.
Find out how much you may be able to borrow with our ‘how much can I borrow calculator’.
What exactly is Lenders Mortgage Insurance?
Back in 1965, the Housing Loans Insurance Corporation started offering lender insurance policies that covered any losses that a lender incurred if a borrower was unable to pay their mortgage.
These policies still exist today and a known as Lender’s Mortgage Insurance, or LMI.
It’s important to note that although this insurance covers the borrower, the cost of the policy is usually passed on to borrowers as an upfront one-off payment. These payments are calculated by your financial institution and can run into the thousands.
If you have a 20% deposit (or a place on one of the government guarantee schemes), many lenders will waive the LMI fee. Another reason to save big if you can.
A final word
Saving for a home loan deposit can be hard work, but it is well worth the small sacrifices you may have to make along the way. Australians love their homes, and taking this first important step towards owning your own is a way of committing to your future happiness. It’s essential to be fully informed of all the possibilities open to you, so make sure that you talk to your lender about the different options available and discuss everything with a trusted advisor before making any major financial decisions. To talk to Shore Financial about your home loan deposit click here.
Other buying real estate articles and resources
Guide to buying a house or an apartment in NSW
Buying a house or apartment in NSW eBook
Buying a house or apartment in NSW FAQ's
Key property inspections when buying a house
Using superannuation to buy a house or unit, can it be done?
