If you’re asking, ‘how much deposit do I need for a home loan’, we've got the answers. Read on.

You’ve been cutting back on takeaway coffee, Uber Eats and nights out with your mates. You’ve learned everything you can about government first home owner grants, incentives and cash rate changes.  And you’ve made some good strides to getting a deposit saved up for your new home.  But how do you know when it’s time to enter ‘house-hunting mode’? How do you know when your deposit is enough? As lending experts, we’re often asked, ‘how much deposit do I need for a home loan?’ The short, unhelpful answer is ‘as much as you can save’. A slightly more helpful answer is 20% of the purchase price. But both of these answers highly depend on your personal situation. So how much deposit is enough?

How much deposit do I need for a home loan?

Do you feel home loan ready?

As predictable as it is, the basic question you need to answer is whether you feel ready to take on a home loan. This isn’t just financially ready, it’s whether you feel like all the other ‘big life factors’ are falling into line. Do you have a solid employment history and a stable income? How’s your credit rating? Are (any) other debts in your life manageable and under control? Can you plan and stick to a budget and savings goal? All of these are questions that any lending institution is interested in (and will want to know the answer to). So along with the ‘how much deposit do I need’, be sure you’re on top of your broader employment, financial and savings situation.

How much are you comfortable borrowing?

The next question you need to ask is how much you’re comfortable borrowing. Depending on your personal situation, it can be possible to put down a deposit (and become a mortgage-holder) with as little as 5% of the value of the home. This would leave you with borrowing 95% of your mortgage value, however. And whether you’re comfortable with that depends on how risk averse you are. Of course, your ability to be approved for a home loan with a very low deposit will depend on those questions above – your employment history, credit history and proof of a consistent savings plan. All of these help the lending institution determine whether you are a ‘good credit risk’ for them and have the capacity to make the required payments on your mortgage. Of course, if you do want to buy a home with such a small percentage down, you will also be required to get Lender’s Mortgage Insurance (LMI).

Lender’s Mortgage Insurance

For deposits of less than 20% of the home’s value, you will likely need to purchase Lender’s Mortgage Insurance (LMI). This is insurance that protects the lending institution against the home loan borrower defaulting. Ultimately, you can purchase a home with a smaller deposit, but if you are required to take out LMI, you can end up paying off a higher loan amount. For example, if you’ve saved a $50,000 deposit and would like to purchase a $500,000 home. Your deposit is 10% of the purchase price. A lending institution would require you to take out LMI. If you proceed to make another $50,000 in mortgage repayments but then default and cannot make any more payments, the lending institution is still owed $400,000. If they decide to step in and sell the house, the market may have changed and your home sells for $380,000. The lending institution is $20,000 out of pocket, not including the interest they would have earned over the life of your home loan. This is what LMI is designed for. If your lending institution does require you to purchase LMI, it can be paid upfront or be included as part of your loan terms. This increases the amount you are required to pay (along with the related interest, over the life of the loan).

What about a guarantor?

You may be in a life situation where you have someone ready to be guarantor for your home loan, in which case you can avoid having to pay LMI with a low (less than 20%) deposit. So, what’s a guarantor? It’s someone who guarantees your loan to your lending institution. This might be the full value of the loan, or a part of it. But if you default, the guarantor agrees to cover that default. Because of the risk involved, the guarantor is usually a close family member, such as a parent or sibling, or even a friend or colleague. Be aware that as security for your home loan, the guarantor is required to put their own property down. If you are unable to make your home loan repayments (such as under the LMI scenario above), your guarantor could be required to sell their property to repay your home loan.

What is the best-case scenario for a home loan deposit

While it’s possible to buy a home with as little as a 5% deposit, a low deposit brings its own potential complications, additional expenses, and risks. So, rather than thinking ‘how much deposit do I need for a home loan’, reframe your thinking to ‘what is my best-case scenario for a home loan deposit’. In most cases, this will be 20% of the value of the home you wish to purchase. For the $500,000 home mentioned above, this would be a deposit of at least $100,000. Of course, it will take you longer to save a 20% deposit. But you will ultimately pay less interest over the life of the loan. Additionally, you won’t have to pay LMI. And you won’t need to ask anyone to go guarantor for your home loan. Plus, in taking longer to save, you’ll also be developing good financial habits and market awareness.

Talk to an expert

If you’re still wondering, ‘how much deposit do I need for a home loan’, give us a call. We’re happy to help you crunch the numbers for your own situation and determine the deposit you may need for home loan pre-approval. With the Lending Loop team by your side, we’re confident you will realise your dream of becoming a homeowner. We can help you find the best lender for you and answer all your questions about being a first homebuyer.  We regularly deal with more than 40 of Australia’s biggest banks and specialist lenders. So give us a call today at Lending Loop.