If you are buying a property understanding how home loan deposits work is important, because it impacts what loan you can qualify for - and what property you can afford. If you are a first time home buyer, and this is all new to you then this is especially relevant.
Our guide will help you understand:
Let’s start by explaining - in plain English - what a home loan deposit is.
There are two parts to a home loan, the home loan deposit and the loan itself.
The home loan deposit is the initial sum you put down to secure a loan with a lender.
It shows a lender that you are able to save, gives them some security and reduces their risk. You can put a deposit down for any amount from 5% to 20% or more of the property’s value. Most people have to save over time for a home loan deposit, though you may also be lucky enough to be gifted this amount from your parents or another family member.
The size of your home loan deposit is important as it determines what loan you qualify for - and what property you can afford.
Example: Let’s assume you are looking at buying a property valued at $500,000. If you save a $100,000 deposit (20%) you can qualify for a $400,000 loan. Save a $50,000 deposit (10%) and you will have a slightly larger loan of $450,000 to pay off. You may also have to pay Lenders Mortgage Insurance (LMI) unless you have a guarantor.
Property price: $500,000
Tip: Save a 20% deposit and this could qualify you for a reduced interest rate, and it also means you don’t have to pay Lenders Mortgage Insurance (LMI).
Let's start by looking at all the costs you need to budget for.
It’s important to realise that the biggest two hurdles to buying a property is saving for a home loan deposit and paying stamp duty.
Stamp duty is a government tax that applies to the purchase of a property which you, the buyer, pays. It is based on the purchase price of a property. Depending on where you live, you could:
Other costs that you need to factor into your budget - which many first time buyers simply don’t know about - include:
After you move in you will also need to cover:
There is no minimum deposit for a home loan, and deposits can range from 5%, to 10% and 20% or more of the value of a property.
Larger deposits give you more leverage and could even get you a reduced interest rate, but they are not compulsory. Lenders will accept a deposit of 5% or 10%, but this does mean you will have to pay Lenders Mortgage Insurance (LMI) - which applies for loans above 80%. LMI protects your lender in case you can no longer make the repayments on your loan. If you have a smaller deposit - then you need to budget for this extra cost.
Tip: If you want an idea of how much the LMI could be on your home loan, use an online tool for an indication of the LMI premium payable.
Generally, the bigger deposit you have saved, the less you have to borrow and repay.
The size of your deposit has a big impact on two aspects of your home loan, namely the size of the weekly/monthly repayments you make and the interest rate you pay.
A large deposit (20% or more) means you need to borrow less from your lender, which translates into less interest to pay over the life of the loan, and smaller weekly/monthly repayments. Some lenders will also give you a lower interest rate if you have a larger deposit. Larger deposits also lower the Loan-to-Value Ratio (LVR), a calculation lenders use when assessing your loan application.
Your LVR is calculated by dividing the amount of your home loan by the purchase price or appraised value of the property.
The lower the LVR, the lower the risk to the lender. Many lenders will consider an LVR over 80% of the property value to be a higher risk, and you could have to pay LMI.
Tip: LVR is closely related to the size of your deposit, so a loan with an LVR of 80% will typically require a deposit of 20%.
You can use our handy calculator to work out how much you can borrow, which can help you work out the deposit you will need to save for. Simply input some basic information around your income, living expenses and how frequently you want to make repayments and it will give you a rough idea:
You can then work out a savings plan and set some goals.
Saving for your first home can be tough, especially with a median house price in the region of $800,000 - but it is not impossible if you are organised and disciplined.
Some good savings habits to develop include:
Changes to your lifestyle - such as moving back in with family to avoid paying rent, or switching your car for public transport - can all help you save. Remember every little helps.
Tip: If you are a first home buyer then you could be eligible for government concessions and grants, which help reduce the amount you have to save toward a deposit. These will also be considered by your lender as part of your home loan deposit.
You pay a deposit to the vendor (seller) when you sign the contract of sale. This is by negotiation and can be around 5-10% of purchase price. The remainder of the deposit is paid at settlement.
The process is slightly different if you buy at auction, as you sign the contract and pay the deposit on the same day. The amount you have to pay varies depending on where you live. In NSW for example you are required to pay a 10% fixed deposit, unless you agree otherwise with the seller. The most common ways of paying a deposit include by personal cheque, counter cheque, electronic funds transfer (EFT) or deposit bond.
Tip: Don’t confuse a home loan deposit with a holding deposit, which is a small portion of the full deposit that you pay to the seller to confirm you are a serious buyer. Holding deposits are typically 0.25% of the offer price, but this does vary by state.
No deposit loans were common before the global financial crisis (GFC), but the financial risk for lenders means they are not as common today.
You generally cannot buy a home without a deposit, though there are some exceptions. One is getting someone - like your parents or a relative - to guarantee your loan, by using their property as security. This is called a guarantor loan.
If you already own a property, you can also use the equity - the portion of the property you actually own - as a deposit or security for a home loan.
Home loan providers take a number of factors into account before they approve a home loan.
They need to work out if you can afford to pay - or service, your monthly home loan repayments. To qualify for a home loan you need to have the deposit, meet the LVR threshold and be able to service the loan. Your serviceability is based on your monthly expenses/outgoings/debts which is subtracted from all your monthly income.
The LVR is the loan amount as a percentage of the value of your property. To calculate it, you simply divide the loan amount by your property’s value.
Yard can provide loans for up to 80% of a property’s value without Lenders Mortgage Insurance. For example, if a property has a value of $1 million, we may lend you up to $800,000. Yard can lend up to 95% of the property’s value with Lenders Mortgage Insurance.
Tip: Save a larger home loan deposit and lenders are more likely to approve your application, as you appear a low risk to them.
Wondering how to apply for your first home loan?
With Yard it's a simple, three step online application you can complete anytime, from any device.
Tell us about yourself: Securely share your personal financial details. We verify your identity, credit history and financials online.
Design your loan: Design the features of your loan to match what works best for you.
Get approved! When all of your details check out, we provide you with the decision on your loan!
We then settle your loan and take care of the rest so you secure your dream home asap!
Armed with this knowledge about home loan deposits - and all the costs involved in buying a property, you should now be in a better position to start saving. Don’t forget to make use of the tools on our site to help you work out how much you can borrow or what your setup costs could be.
Have any questions about saving for a deposit - or anything else? We’re happy to help, and our local team are available to chat at a time that suits your schedule