How Much Do You Really Need for a Home Loan Deposit?
The minimum home loan deposit generally required by lenders is 5% – meaning the other 95% of your property’s purchase price will require a mortgage
Using the First Home Owner Grant (FHOG) for your home loan deposit
The First Home Owner Grant (FHOG) could also count towards your deposit. If you’re unsure what it is, or if you’ll be eligible, we have a handy explanation of the FHOG that might help you.
Lenders Mortgage Insurance (LMI) explained
So what is LMI? Basically, it protects lenders in the event of borrowers defaulting on their loans. Think of a $400,000 house. If a bank lends you $360,000, and you repay $40,000 but then fall prey to financial woes and can’t make your repayments, the bank is then $320,000 out of pocket. Worst case scenario, a bank may need to seize your house – but they may only be able to sell it for $310,000. They’d still be ten grand out of pocket. And, that’s not even accounting for the interest they would have expected on such a loan.
Hence, mortgage insurance. You can pay it upfront or include it as part of the loan. So, borrowing $367,000 instead of $360,000 (or, paying $7,000 upfront). At this point, it’s important to remember that borrowing a higher amount not only means repaying that higher amount – but also repaying a higher amount of interest. For example, paying interest on $367,000 at 5%, is obviously more than paying interest on $360,000 at 5%.
(Now, even if that sounds like a relatively small difference – remember that variable interest rates are subject to change. You may be able to repay your loan at 5% interest. Can you do it at 7%? Or 9% Or, worst case scenario, 19%? They’re all possibilities.)
Now, it is possible to sidestep purchasing mortgage insurance by having someone act as a guarantor for the loan. This is basically where another person puts their property up as additional security for a loan. The most common example of this is a parent putting their property up as security for their son or daughter’s loan. (Bear in mind, if you fail to make your repayments in that situation, your parents could end up selling their house to repay your loan. Not a pretty situation.)
how much do you need for a house deposit?
In some scenarios, you can feasibly get away with borrowing 95% of the property value. But, as demonstrated above, that won’t come without considerable complications, expenses and risks. Perhaps a better question to ask is – ‘how much should you have for a house deposit?’
Which actually has a more straightforward answer. Generally, banks and financial institutions will recommend you have a deposit of at least 20% of your prospective property’s purchase price. So, if we go back to our $400,000 home, you’d want to provide $80,000. Now, that will take a lot longer to save – but you’ll pay less interest, you won’t have to pay insurance costs, and you won’t need to have a guarantor.
As always, it’s up to you what will work best for your situation. Really, when it comes to a long-term financial commitment like a home loan, it’s as much about your ongoing financial comfort as it is about having any specific set of money – even if you have that token $80,000, can you guarantee you’ll be able to make your repayments into the future? Even if your interest rate changes? That’s what will really determine if you’re ready to buy a house.
- Know what your price range is, and how much of a deposit you can put down.
- Be aware there are other costs to consider when buying a home.
- Your personal circumstances and how your finances are organised can affect how a lender approaches your home loan.
- If you’re a first-time buyer, government support is available.
Loans and Mortgages ensure to help you out with the process of taking advantage of the home loan deposit, as your best mortgage broker in Australia we can also help to ensure all other paperwork is taken care of. We help you out in New South Wales, Victoria, Queensland, Western Australia, South Australia, and Tasmania.
Call us today and let’s get you help on your home loan.