How Much Deposit Do You Really Need For A House?

This is an age-old question for house hunters, but as with many personal finance queries, the answer is specific to the individual, their financial circumstances, and what they’re hoping to achieve. Generally speaking, your deposit amount is based on the value of the home you’re looking to buy – the higher the property price tag, the larger the deposit you’ll usually be forking out.

This is the norm for two main reasons. The first is that it’s usually advisable to minimise any debt you’re taking on when possible, as you’ll be paying interest on that principal loan amount. The second is that a higher deposit shows banks and lenders you have the capacity to save and manage money, and are in a position to pay down or ‘service’ the loan. Being perceived as a low-risk borrower comes with advantages like lower interest rates or more flexible loan conditions, which can save you thousands of dollars over the life of a loan.

Certain banks and lenders may only consider loan applications with a specific deposit amount, or might only offer home loan specials to borrowers who fit this criteria. Generally, investors will be asked to present a larger deposit than buyers looking to live at the property.

You’ll find many lenders offer their best or ‘headline’ interest rates to borrowers with a 20% deposit or higher, but some may accept a 5% deposit or even lower if you qualify for certain grants or conditions. This could include having someone act as a loan guarantor, taking on the burden of the debt if you default on the loan, or having the government act in that capacity through home buyer schemes.

Taking out a home loan and purchasing property comes with additional costs such as legal fees (often called conveyancing fees), stamp duty (aka transfer duty), inspection costs, home insurance, and other up-front application costs the lender may charge. Plus, if you don’t meet deposit requirements, you may have to cover Lenders Mortgage Insurance (LMI) as a way to offset the risk lenders take on by accepting a low-deposit home loan application.

You’ll want extra cash in the bank dedicated to covering all associated home loan costs in addition to your deposit, plus accessible funds for any other emergent costs that pop up.

Loan-to-value ratio (LVR) is the technical term used by most lenders to describe the amount you’re borrowing in relation to the value of the property you’re purchasing, expressed as a percentage. It’s effectively the converse of a deposit size.

For example, if you have a 20% home loan deposit, your LVR is 80%. But it doesn’t always come in round figures, so let’s lay out the sums.

Say you’re looking to buy a home worth $675,000 and you have $72,000 to put down as a deposit:

Banks calculate LVR by first deducting the deposit from the home value.
$675,000 – $72,000 = $603,000

Then, that resulting figure (aka the ‘loan’) is divided by the overall property ‘value’.
$603,000 (loan) ÷ $675,000 (value) = 0.89

Multiply that figure by 100 and you’ve got yourself an LVR expressed as a percentage.
0.89 x 100 = 89% LVR

Generally, a lower LVR will grant you access to more affordable loan terms and may qualify you for lower interest rates others can’t access. So, it’s always worth doing calculations ahead of time and weighing up your deposit against the value of the homes you’re considering purchasing.

Every bank or home loan lender will carefully scrutinise your financial circumstances when considering your home loan application. Assessment criteria can differ between providers, but there are some standard factors that lenders consider when judging your home loan serviceability (aka your ability to pay down the loan) and whether or not they’re willing to lend to you. These include:

• Employment, showing regular income that can cover home loan repayments and potential interest rate fluctuations.
• Existing debts and how reliably you have paid these down.
• Regular expenses you already cover, including necessities like rent, food, and power, as well as discretionary spending.
• Government grants and schemes you may be eligible for.
• Your deposit and LVR
• Genuine savings, generally accrued for a minimum of three-six months, that shows your budgeting capacity.
• Your credit history, which details the debt, loan applications, and repayments that make up your credit score.

As discussed above, every lender has different home loan assessment criteria, with the source of your home loan deposit usually considered. Most banks and lenders want to see evidence of genuine savings ability over time to prove you are financially responsible and will be able to service the loan moving forward. So in this sense, the source of your deposit could affect the success of your home loan application.

However, there’s no set deposit percentage that must come from your savings. Money that comes via inheritance, government grants, sale of assets, or as a gift from loved ones can still be used to build up your deposit.

There are numerous government incentives prospective homeowners can apply for to get a leg up on the property ladder. Many of these are targeted at first home buyers, and include lump-sum grants, guarantees, and saving mechanisms.

There are different eligibility requirements for each scheme related to your income, savings caps, the price of the property, and the property type (e.g. a newly built home vs an existing apartment), and these can vary from state-to-state. So, be sure to check the relevant state or territory government source where you live when investigating the options below.

First Home Owner Grant

The title of the First Home Owner Grant varies between the states and territories, as do the inclusions in this government offer. These grants can offer a lump-sum payment to first-time buyers that goes towards the purchasing of a home, or provide full or partial exemption from paying stamp duty (aka transfer duty) – or both incentives combined if you meet the criteria.

For example, in New South Wales eligible first home buyers can receive a $10,000 bump to their deposit (if they’re purchasing a newly built home they plan to live in) and get a full or partial transfer duty exemption. In South Australia, that payment can rise to $15,000 for new home purchases, but stamp duty isn’t factored into the equation.

Find your relevant state or territory First Home Owner Grant to check further eligibility requirements and what’s offered where you live.

First Home Super Saver Scheme

You’ll receive tax benefits on savings dedicated to purchasing a property by making voluntary contributions to your superannuation through the First Home Super Saver Scheme. When you build a deposit in your super fund through the scheme and eventually withdraw those funds to make a property purchase, you’ll receive a tax offset that puts you in a better position than simply accruing the money in a savings account. Use the Commonwealth Superannuation Corporation’s calculator to determine what the savings benefit could be for you.

You can make up to $15,000 in voluntary super contributions towards this goal each financial year (in addition to the compulsory 10% your employer makes), to a maximum of $50,000. This is for an individual, meaning couples or even friends can each save this amount through the scheme and use the combined funds to purchase a property together.

First Home Guarantee

Previously known as the First Home Loan Deposit Scheme, this government guarantee makes it possible for eligible first home buyers to take out a home loan with a deposit as low as 5% without having to pay LMI. This additional fee is usually charged by banks when a borrower can’t make a 20% deposit on a loan.

With the First Home Guarantee, the government is effectively acting as a guarantor on up to 15% of the property’s value. There are now 35,000 places available in this scheme each financial year.

Family Home Guarantee

Like the First Home Guarantee, this incentive also provides a government guarantee if you can’t cover a 20% deposit. However, the Family Home Guarantee covers up to 18% of the property value (so you can pay as little as a 2% deposit) and is open exclusively to eligible single parents with at least one dependent child, whether they’ve owned property previously or not. There are 5000 places available in this scheme until June 30 2023.

Motivation to save for a home deposit can come from many avenues, and every person’s approach to savings can differ. But if you’re struggling to squirrel away funds for your dream home, here are a few deposit-saving tips:

• Make a budget and stick to it. Do a full audit of your finances and see where you could be saving money on essentials or cutting out unnecessary spending. You don’t need to cull all your extracurriculars, but you should differentiate between spending that brings joy versus thoughtless cash splashing, and cut out the latter.
• Set savings goals. Setting regular times to stash away a predetermined savings figure (perhaps weekly or monthly) can help keep you on track towards your mortgage deposit goal. Similarly, larger savings milestones at dates down the track can keep you motivated on your home buying journey.
• Pay down existing debt. Clearing lingering debt can cut out expenditure going towards interest payments, and could increase your credit score to make you a more attractive borrower.
• Investigate government assistance. Check if you’re eligible for government home-buying schemes or grants, and make sure applying for this assistance puts you in the best possible financial situation overall.
• Compare savings accounts and term deposits. If you’re building a home loan deposit in a savings account or term deposit, it’s worth finding an account with no fees and a higher interest rate to grow your nest egg even quicker. Just make sure you have the capacity to meet any interest-earning criteria like making regular deposits, growing the balance, or not withdrawing from the account.