It’s common for many homebuyers to wonder how much deposit they need to buy a house. If you’re ready to start looking for your first home, a good starting point is to determine how much deposit you need to save to get started.
Long gone are the days when a first home buyer could borrow 100% of the purchase price of a property, effectively allowing people to enter the property market with zero deposit needed.
These days, lending criteria from banks has restricted the amount homebuyers are able to borrow in relation to the property’s purchase price. Fortunately, there are still some banks and financial institutions around that will let you borrow a high loan-to-value ratio (LVR) loan, so you can get into the market even if you only have a small deposit saved.
Calculating how much deposit the banks want
Many banks and non-bank lenders are willing to lend up to 95% of the property purchase price. Essentially, this means you’ll need to save at least 5% of the purchase price to put towards your deposit.
So, if you’re buying a home valued at $400,000 then 5% of the purchase price is $20,000. Your loan amount will be $380,000, which is a 95% loan-to-value ratio (LVR).
If you choose to buy a property for $300,000, you’ll need to save at least $15,000 to cover the minimum 5% deposit needed.
However, the deposit amount isn’t the only expense you’ll need to factor into your savings budget. It’s also important to ensure you have sufficient funds to cover any other fees associated with the purchase.
Calculating other fees and charges on top of your deposit
Aside from your 5% deposit amount, you also need to be sure you have enough money saved to pay for the other fees and charges you need to pay when you buy a house.
For example, if you’re buying an established home you’ll need to pay stamp duty on the whole purchase price. However, if you buy a house-and-land package you’ll only pay stamp duty on the purchase price of the land, instead of on the whole package amount.
You’ll also need to pay conveyancing fees, mortgage registration fees, transfer fees, building inspection fees, and a once-off Lender’s Mortgage Insurance premium. There are some lenders around that may also let you borrow an additional 2% to help cover your Lender’s Mortgage Insurance costs, which could effectively take your loan amount up to a potential 97% LVR.
There are also other fees that may apply to your purchase, so it’s important to discuss your finance needs and potential costs with a mortgage broker before you go house-hunting.
How much deposit is needed to avoid Lender’s Mortgage Insurance?
Anyone borrowing more than 80% of the property value will pay a Lender’s Mortgage Insurance (LMI) premium. The amount of LMI you pay will depend on a variety of factors, including your loan amount, your final loan-to-value ratio, and the state in which you live.
You can avoid paying LMI if you have a deposit that is at least 20% of the home’s purchase price.
So, if you’re buying a home for $300,000 you’ll need at least $60,000 to cover a 20% deposit. You won’t pay any LMI premiums, but you will need to be sure you have enough additional funds to cover the cost of any other fees and charges associated with the purchase.
Saving a larger deposit can seem intimidating, but it also means you’ll have a smaller mortgage with lower repayments once you move in. It may also mean qualifying for lower interest rates with some lenders.
Other ways to provide a home deposit
It’s common for many first home buyers to feel daunted by the amount of money they need to save just to buy a home. In fact, many give up, believing they’ll never be able to save enough to cover the deposit and all the fees they need.
What you may not realize is that there are some things you can do to potentially reduce the amount of cash you need to save. These include:
- First home owner’s grant: The first home owner’s grant (FHOG) is still available if you choose to construct a new home, buy an off-the-plan apartment or buy a house-and-land package. There’s potentially up to $15,000 available to put towards your deposit and fees.
- Off-the-plan concession: Some off-the-plan apartment projects may qualify for a concession off the amount you need to pay in stamp duty fees which could potentially reduce the amount of savings you need in this instance.
- Gifted funds: If your parents or family members are keen to help you get into the property market, they may offer to give you the cash needed to complete the purchase. If someone gives you a gift of cash to put towards your deposit, you’ll need to verify where it came from and prove that it’s a non-repayable gift. It’s also a good idea to keep in mind that the lender may also want to see evidence that you’re also able to save money, so don’t give up on your savings plan just because your family has helped out with extra cash.
- Family guarantor: Your family members might have equity available in their home that may be used as security for your home purchase. A guarantor loan allows your family member to use only enough of their own property’s equity so that the amount of deposit used is big enough to avoid paying LMI premiums. The amount of cash required when utilising this option is often much lower than the high LVR loans.
Saving a deposit to buy a home can seem daunting, but there are plenty of ways to still enter the property market with only a small deposit. The key to ensuring you have enough cash to buy your first home is to discuss your options with a qualified mortgage broker before you go house-hunting.
For assistance and advice to help get you into your own home, contact Assured Home Loans on 08 83 600 200.