Saving for a deposit is the biggest hurdle faced by most Australian first home buyers. But why do you need a deposit, and how much do you really need?
A lender will ask you for a deposit because it reduces their risk in two ways. First, it shows the lender you’re financially responsible and can manage your money. Second, it reduces the lender’s risk of not recovering their money.
If you default on the loan, the lender is stuck with the debt. The lender will then incur additional costs to repossess and sell the home.
With a standard deposit, the lender will most likely have enough money to pay the costs and settle the debt.
In contrast, a small deposit may not cover these costs, which increases the lender’s risk. That’s why you generally have to pay lender’s mortgage insurance (LMI) if you have a small deposit – the insurance company will cover the lender’s shortfall.
A standard deposit is 20%. Any deposit lower than 20% may be considered a small deposit.
Benefits of a large deposit
Because a large deposit reduces the lender’s risk, they’re more likely to:
- Offer you better interest rates (because they want to compete for your business)
- Waive LMI
From your side, you’ll:
- Find it easier to qualify for a home loan
- Have lower monthly instalments
- Avoid paying LMI
- Save a lot of money on interest over the course of the loan
Drawbacks of a large deposit
Saving for a large deposit can delay the home buying process by several years. In the meantime, you’re probably paying rent, which is an expense, instead of a home loan, which is an investment.
Also, if the property market is strong, you may find that prices are rising faster than you can save.
Additional costs
When buying a home, you don’t just have to save a deposit, you also need savings to pay for some or all of these costs:
- Stamp duty
- Conveyancing costs
- Building and pest inspections
- Buyer’s agent fee
- Transfer fee
- Mortgage registration fee
- Loan application fee
- Lender’s mortgage insurance (if you have to pay it upfront)
So you’d need to save another 1-10% in addition to the deposit.
Government assistance
The federal government implemented the Home Guarantee Scheme to help Australians buy properties sooner. The government guarantees a portion of the buyer’s loan, so they can enter the market with a smaller deposit and still avoid paying LMI.
This scheme is divided into:
- First Home Guarantee (FHBG)
- Regional First Home Buyer Guarantee (RFHBG)
- Family Home Guarantee (FHG)
You qualify for FHBG if you’re buying your first home as your primary residence. You also need to:
- Be an Australian citizen – or be one by the time you need the loan
- Be 18 years or older
- Not earn more than $125,000 if you’re an individual or $200,000 as a couple
- Have at least a 5% deposit
- Buy a residential property not exceeding the price caps (which depends on the location)
To qualify for RFHBG, you must also have lived in a regional area for at least a year and be buying a home there.
FHG is available to single parents and requires only a 2% deposit.
Some state governments also help first home buyers by giving them grants and exemptions or reductions in stamp duty. Each state has its own benefits and criteria.
Not sure which lender would actually say yes, or what you could borrow? That is the part we do for a living. We are mortgage brokers, so we compare across a panel of bank and non-bank lenders, and we know how each one reads a file. Call us on 1300 899 724 or book a time to talk it through.
Buying a home? Start with our guide on how to buy a home in Australia.