How much do you need for a house deposit?

Knowing how much you need for a deposit can make it easier to plan for your new place

Your home deposit will likely be your largest upfront property-buying expense – but how much do you need to save up?

In this article, we’ll look at how big your home loan deposit needs to be, tips for saving and options for those with low deposits.

How big should your home deposit be?

Typically, lenders prefer borrowers with a deposit of at least 20% of the property’s value. That means if you’re buying an $800,000 home, you’ll need a $160,000 deposit.

However, there can be a level of flexibility when it comes to how much you need to save.

If a 20% deposit is out of reach, you may be able to get a home loan with a lower deposit. Generally, though, lenders will charge Lenders Mortgage Insurance (LMI) if you are borrowing over 80% of the property value.

While paying LMI isn’t the end of the world – nor is it that unusual – it is an added expense to what will probably be one of your largest purchases ever.

Ideally, as a borrower, you’ll want to save the largest deposit possible so that you can keep your debt to a minimum.

If you have a larger deposit, you won’t need to borrow as much and you’ll likely pay less home loan interest. Your repayments might be lower too.

You might also like: Home loans 101: Loan to Value Ratio (LVR)

How to save up a deposit for a home

Saving up a home deposit isn’t an easy feat. If you live in an expensive area, it could take several years before you have enough saved and the property market could change during this time. Here are some tips for saving up a home loan deposit:

1. Know how much you need to save: set a budget for the property you intend to buy. It’s hard to save up a deposit if you don’t know how much money you’ll need. Don’t forget to consider other upfront costs, such as stamp duty, legal fees and application fees.

2. Take advantage of government schemes: the First Home Owner Grant, First Home Super Saver Scheme and Home Guarantee Schemes can help you grow your deposit or find out how to spend less on it.

3. Reassess your budget: take the time to analyse your budget and see where you can spend less so that you can put more into your deposit savings.

4. Use a high interest savings account: make your savings grow a little faster by opening a high interest savings account for your deposit funds.

You might also like: Home loans 101: How much can I borrow?

Can you use gifted money for a deposit?

Yes, most lenders will accept monetary gifts, for example, from the borrower’s immediate family members, as part of a deposit. However, the borrower will still need to prove they can afford the loan and will need to adhere to the bank’s lending criteria.

With the housing market as expensive as it is, it’s not uncommon for families to gift their child part or all of their deposit. But the ‘Bank of Mum and Dad’ can only get you so far.

Lenders need to be certain that you can comfortably afford to repay the loan you take out and may still need you to provide evidence of having genuine savings.

Additionally, lenders may request that the party gifting the money provide a ‘gift letter’ stating that the funds have been handed over without an expectation of repayment.

Guarantor home loans

A different way that families like to help out financially is by going guarantor on the borrower’s home loan.

This is where typically a close family member (e.g. a parent) uses equity from their own home to secure a mortgage for another person.

The equity needs to cover at least 20% of the new property’s value and the

lender will take out a home loan against the guarantor’s property until the expiration or removal of the guarantee.

The guarantor can be removed from the loan once the guaranteed amount has been paid off or the home’s equity has increased through a jump in property value, for example.

The main risk of getting a guarantor is that if the borrower is no longer able to repay the mortgage, the guarantor is liable to repay the loan – until they have been removed from the loan.

So, before diving into getting a guarantor loan, it’s a smart idea for both parties to speak to a financial advisor. Both the borrower and guarantor need to understand their obligations and what they’re signing up for.

Guarantors shouldn’t agree to guarantee a loan if they have concerns about the borrower’s ability to manage the loan. However, they should only agree to be guarantor if they can realistically handle another set of loan repayments, if it comes to that.

Low deposit home loans

While it’s good to aim for at least a 20% deposit, it is possible to get a home loan with a lower deposit.

For a borrower with a stable income, good credit score and an overall positive financial situation, they might be able to get a fairly mainstream home loan with a deposit under 20%.

But the lower your deposit, the tricker it is to get a home loan. While there are loans available, even borrowers with a deposit of 10% tend to attract higher interest rates and lenders may be more hesitant to approve them.

In most circumstances, getting a home loan with a deposit below 20% will mean paying LMI.

Sometimes this can be worth it, if it means you are able to jump on a good opportunity or secure your dream home. But it does increase your home-buying expenses.

You may be able to purchase a home with a low deposit and avoid paying LMI if you’re eligible for one of the government-run Home Guarantee Schemes.

With the First Home Guarantee, eligible buyers can buy a home with a deposit as low as 5%. The government guarantees the remaining 15%, so lenders can approve these buyers for loans without charging LMI. This scheme is specifically for first home buyers and income and property price restrictions apply.

The Regional Home Guarantee works similarly, as buyers also only need a 5% deposit. You don’t need to be a first home buyer but you can’t have owned land over the past 5 years and must buy in a regional area.

With the Family Home Guarantee, eligible single parents of dependents can purchase a home with a deposit as low as just 2%. This means that the government can guarantee up to the remaining 18%.

Read our guide on the Home Guarantees here.

Is it possible to buy a house with no deposit?

Yes, in some circumstances it’s possible to buy a house with no deposit. This is typically done through the borrower using a guarantor who uses equity from their own property as security in place of a deposit.

Read more about how to buy a home with no deposit here.

If a guarantor loan isn’t an option, you may need to wait until you’ve saved up enough to qualify for a low deposit loan at minimum. If you’re eligible for one of the Home Guarantee Schemes you could be able to get a home loan with a deposit as low as 2-5% without having to pay LMI.

Alternatively, if you already own a property, you may be able to use the equity you have in that property to secure a loan for a new purchase.

You might also like: First home buyer guide: government grants and concessions

Why buy a home with a low deposit or no deposit?

Buying a home with a low deposit could mean paying LMI and possibly taking out a much larger loan. But there may be benefits that outweight the costs of this hefty fee. Here are a few reasons why some buyers do it:

1. Jump on a good investment opportunity: buyers may opt for a low deposit home loan when a good investment opportunity swings by.

2. Buy your dream home: sometimes your ideal property will come by when you least expect it – and maybe when you haven’t prepared a deposit. Sometimes buyers will be afraid to miss out and will scramble to get a low deposit so that they secure their dream home.

3. Take advantage of low interest rates or a good home loan deal: from time to time, there are low home loan rates available and some buyers want to start paying off a home loan while rates are low.

4. It’s taking too long to save 20%: sometimes it’s a patience thing. People want to own a home and in an expensive market, saving up a deposit can feel like a never-ending process.

While many of these reasons make sense, try to avoid rushing into buying a home when you aren’t financially prepared. If you’re not cautious, you could land yourself in a financially stressful situation. Sometimes it’s better to wait until you’ve saved up enough money before you buy property.

No matter the size of your deposit, your local FND Broker is always happy to chat through your mortgage options with you. Book an appointment today to learn more.