If you’re wondering, “how much deposit do I need for a home loan?” – the answer is not as straightforward as you might think. How much of a deposit you choose to pay is specific to you and your personal financial situation or needs.
While most lenders require a minimum of 105% house deposit, the bigger your deposit amount, the smaller the chances of having to pay lenders mortgage insurance (LMI).
But, if you’re eligible to pay a smaller deposit, it could mean entering the property market sooner than you had expected.
So, when it comes to how much deposit you need for a home loan, it’s more to do with your financial situation, what lenders offer you and what you’re willing to pay.
Here are a few factors for you to consider.
Why Lenders Require Lenders Mortgage Insurance
Lenders need some form of security in case borrowers default on their monthly repayments. If borrowers pay a 20% cash deposit upfront, lenders consider that to be enough security.
If you pay less than 20%, you’ll likely be required to pay lenders mortgage insurance.
The LMI policy is in place to protect banks from financial loss in circumstances where you’re unable to meet your monthly repayment obligations.
Adding LMI to your mortgage loan repayments can end up costing homebuyers thousands of extra dollars in the long run.
For this reason, many people try their best to secure a 20% deposit to waive LMI fees.
How Certain Professionals Can Pay as Little as 5% Deposit
High earning professionals are considered low risk to lenders because there is less chance that they will dishonour their home loan repayments. For this reason, they can enjoy a lower minimum deposit and waive their LMI premiums.
If you’re a member of one of the following professions, you could qualify to pay a deposit of 10%:
- Legal professional
- Quantity surveyor
- Mining specialists and mine surveyor
- Medical professional
- Chief financial officer
How Your Parents Can Save You Money on Your Deposit
The most underrated way to acquire a cash deposit is to ask your parents.
If your family is in a position to provide financial assistance, it’s more than likely that they’ll want to help you get ahead in life and become first home buyers. So, it’s worth asking them to help you kickstart your property journey.
If your parents can’t help towards a cash deposit, but they own property, you could ask them to guarantee your home loan using the equity in their property. Depending on their property value and how much they have already paid off, their equity could even be enough to cover other upfront costs such as stamp duty and legal fees.
So, with the help of your parents, you may be able to pay less than a 105% deposit – even up to no deposit out of your own pocket at all.
How FHLDS or FHOG Can Cover 5% of Your Deposit
You can apply for the First Home Loan Deposit Scheme (FHLDS) through the Federal government if you’re buying property for the first time.
Through this scheme, you can borrow 95% of your home’s purchase cost. In other words, you’ll only be required to pay a 5% deposit, while the government acts as a guarantor to cover the rest of your deposit requirements to avoid LMI.
A First Home Owner Grant is funded by the different states and territories and is administered under their own legislation. In some cases, the grant may be used towards the house deposit, but be sure to seek professional advice.
How a Deposit Protect Bond Can Cover Your Deposit
This is a common option when homebuyers can afford the upfront costs but not the deposit and don’t have a family member to act as a guarantee. With a deposit protect bond, the lender acts as a guarantee.
Many people have money tied up elsewhere that they can’t access immediately, but they can use it to pay the deposit at a later date. This type of bond should be paid in full at the end of your loan term.
A deposit protect bond usually amounts to the standard 10% of the home purchase price, meaning you’ll still need to pay LMI. Take note that you’ll also have to pay fees, charges and interest on this separate loan.
To apply, there are financial tests to be passed, similar to the credit application process.
Some lenders offer this feature, and some don’t, so be sure to inquire and make sure if the deposit protection bond is an option.
How to Use Your First Home’s Equity To Pay for Your Second Home’s Deposit
To access your home’s equity, you’ll need to have paid off at least 20% of its current property value. You’ll have to have it reevaluated to determine this and then refinance the house to access its equity.
Similar to using the equity from your parents’ home, in this case, you can also use the excess equity if there is any to pay stamp duty and other costs or unexpected expenses connected to your home loan.
The more deposit you can pay, the smaller your remaining home loan amount will be, and the less interest you will pay over the lifetime of the loan.
Depending on your borrowing power and different lenders’ lending criteria, you could buy your own home and pay 5% deposit.
Although this option might allow you to become a homeowner sooner, you will be paying more money in total in the long run.
Before you begin your home buying journey, be sure to seek financial advice from a mortgage broker.
At The Mortgage Agency, we assess your personal objectives, financial situation and circumstances, and help you realise how much deposit you should be paying for your home loan and how you should do so to best suit you.
They can help identify the lenders that best suit your position, prepare your application, and negotiate the best prices on your behalf.
Lean into the professionals today, and contact The Mortgage Agency as you take the first steps to become a home buyer.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.