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One of the first things you’ll need to think about before applying for a home loan is the amount you need to save for a deposit. Your initial deposit will affect how much you can borrow as well as some of the terms of your loan.

What is the minimum required deposit on a home loan?

Generally, the minimum deposit that you’ll need for a home loan is 10%. Some lenders may let you take out a loan with less than a 10% deposit if certain other criteria are met.

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A 20% deposit is preferable in order to avoid Lenders Mortgage Insurance (LMI) and pay less interest. A larger deposit may also enable you to pay off your loan faster.

How much deposit do I need for a home loan?

It’s best to aim for a 20% deposit, because this is perceived as a safer amount and will allow you to access more benefits. If you have a deposit that’s less than 20%, you’ll have to pay LMI. LMI is an extra cost that the lender charges to protect them against the risk of you defaulting on your loan.

Some lenders may accept a deposit of 5% or less if you have a guarantor or if you’re part of the First Home Guarantee scheme.

However, the deposit you’re able to put down will depend on your budget and your timeline.

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Calculate your price range

In order to know the exact amount you’ll need for a deposit, you should think about what price range you’re looking at and how much you’re willing to spend on repayments.
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Calculate the deposit you can put down

Once you’ve found a house that suits you, it’s time to work out your deposit.

What is LVR (loan to value ratio)?

LVR is used by lenders to assess the risk of a loan. A higher LVR is considered more risky, which is why those with smaller deposits will be required to take out LMI.

You can calculate your LVR by dividing the value of the property by the amount you’ve saved for the deposit.

For example, let’s say you’re taking out a loan for a property valued at $500,000. If you have a deposit of $50,000, then your LVR would be 90%

For example, let’s say you’re taking out a loan for a property valued at $500,000. If you have a deposit of $50,000, then your LVR would be 90%

Additional upfront costs

In addition to the deposit, there are other upfront costs that you’ll have to pay when you take out a loan.

Legal fees

There are a few legal processes involved in buying property, including conveyancing, title checks and drafting the settlement document.

Stamp duty

Stamp duty is a government tax that varies between different states and territories and can be quite a significant expense. It also varies depending on whether you’re a first home buyer or you’re purchasing the property as an investment. You can use a stamp duty calculator to give you an idea of how much this will be.

Mortgage establishment and registration fees

This cost also depends on the state or territory that you’re in, and sometimes on which lender you’re with.

Moving costs

Your personal preference will be a factor when budgeting for moving costs, as well as the distance and the amount of stuff you’re taking with you. If you’re using a service, getting quotes from multiple companies is usually a good idea.

Insurances

If you have to pay Lenders Mortgage Insurance, you may be required to pay it upfront. However, most lenders will allow you to add it on to your mortgage so that you won’t have to pay for it straightaway.

What is lenders mortgage insurance?

Lenders mortgage insurance (LMI) is an additional cost charged by home loan lenders that is either added on to your mortgage or paid for upfront. 

LMI is designed to protect the lender in the case that the borrower is a risk – if their LVR is higher than 80%. The risk is that this borrower is deemed more likely to default on their loan or be unable to make mortgage repayments.

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Borrowing power: How much can I borrow?

There are a few other factors that can affect the amount a lender will be willing to loan you. These factors can also affect the interest rate you’re offered.

Income and expenses

Most people will use their income as a guide to figure out how much they can afford to spend on a mortgage each month, but how much is too much?

This will depend on your individual expenses as well as your spending habits. The general rule of thumb is that your mortgage repayments should not be more than 28% of your gross monthly income.

However, if you have a number of other regular payments, such as credit card debt or tuition fees, you may need to take this into account to make sure you’re not overstretching yourself.

Deposit savings

It’s best to try to save as much of a deposit as possible before buying a home, because this may allow you to access lower interest rates and avoid LMI.

The bank will factor in the size of your deposit when assessing your loan application.

Saving history and credit rating

When you apply for your loan, the bank will run a credit check and request bank statements for 3-6 months, showing your regular expenses and saving ability.

This is an important thing to keep in mind leading up to your loan application. You can check your credit rating online using a credit reporting agency.

Type and length of home loan

The type and length of home loan you choose will affect your borrowing power. A fixed rate home loan may offer more stability than a variable rate home loan, since you won’t have to factor in fluctuating interest rates.

You may also be able to stretch your loan period over a longer term to reduce your monthly repayments, but this means you’ll pay more interest overall.

The price of the property

The lender you choose for your home loan application will do their own valuation of the property as part of the process.

Check our borrowing power calculator

You may wish to use a borrowing power calculator to get an idea of how much you could borrow and establish your limits.

How to save for a house deposit

A house deposit often takes years to save up for, even if you plan and save meticulously. There are a few things you can do to make sure you reach your goal when you need to.

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Pay off other debts

If you have other debts, such as credit card debt or auto loan debt, paying these off first will make it easier to budget and will improve your chances of getting a home loan approved. You could consider consolidating your debts into a single debt with a lower interest rate to make it easier to pay them off.

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Set aside money from each paycheck

This is a very simple but successful method that people often use to save money. As soon as you get paid, deposit a certain amount or percentage of your paycheck into your savings account. You could even set up an automatic transfer so that you don’t have to think about it.

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Cut back on certain expenses

This doesn’t have to mean that you stop buying anything for yourself apart from the bare necessities. It might be as simple as buying takeaway once a week instead of twice a week. This is also often easier to do when you have a specific goal that you’re aiming for.

Home loan deposit grants and schemes

First Home Owner Grant

The First Home Owner Grant allows eligible Australians to receive state funding towards the purchase price of their first home. Different rules apply in each state and territory as to the amount you can receive and the eligibility requirements. This scheme may also allow you to save on stamp duty.

couple getting their first home

First Home Super Saver Scheme

The First Home Super Saver Scheme (FHSS) allows people to save for a house deposit using their super fund. You can do this by making voluntary contributions of up to $15,000 a year.

The maximum amount that you can save through this scheme is $30,000.

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First Home Guarantee Scheme

The First Home Guarantee Scheme (previously the First Home Loan Deposit Scheme) helps first home buyers purchase a property with a smaller deposit (as little as 5%). This also helps buyers avoid paying Lenders Mortgage Insurance.

family moving into new house and received the house key from real estate agent

Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.  

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    Understanding more about house deposits

    Can I buy a house with a $10,000 deposit?

    This really depends on the price of the house you’re trying to buy. If the property value is $100,000, then a $10,000 deposit would be acceptable.

    However, if you need a larger loan amount then $10,000 may not be enough unless you have a guarantor.

    What if I have a smaller deposit?

    There are some options available for home loans if you have less than a 10-20% deposit. You can apply for a First Home Buyer Scheme if it’s your first time purchasing a house, but this comes with specific requirements that you must adhere to.

    If you have a close family member who owns their own property and is willing to act as guarantor, this may also be an option depending on the bank that you choose.

    Some lenders may accept a loan application with a smaller deposit if you have a stable credit and employment history and you’re willing to pay Lenders Mortgage Insurance.

    What if I don't have a deposit at all?

    Buying a house with no deposit at all is undoubtedly tricky and in many cases, not possible. Even if you apply for a First Home Owner Grant, most lenders would like to see that you’ve saved at least part of the deposit yourself.

    If you have little to no deposit, it’s best to speak to a home loan specialist about your financial situation before applying for a loan. The loan specialists at Homestar Finance can discuss your options with you and help you find a solution.