How much deposit do I need to buy a house?

• Saving a 20% deposit to purchase a median-priced house in any capital city can take you upwards of five years.
• If you’re eyeing a home in Melbourne or Sydney, the number of years you’ll need to save will shoot up to seven and eight years, respectively.
• Read on to learn how to get approval with as little as a 5% deposit in the bank.

For many first home buyers, it can take several years of budgeting and putting away money to save an ideal deposit. There’s also the risk of rising property prices while you scrimp and save, further widening the gap between you and your dream home.

This guide will tell you exactly how much you need to save to purchase your first home and what you can do to increase your chances of getting approved for a low deposit home loan.

What is the minimum deposit required to buy a house?

A 20% deposit is ideal but it’s not easy for everyone to achieve. Some lenders understand this and allow you to borrow up to 95% of the purchase price of a property if you meet certain conditions.

In other words, you need a minimum 5% deposit to qualify for a home loan with some lenders. But lenders also will want to determine how you saved your deposit to assess your repayment capacity and saving habits.

So even though you can use a gifted deposit or the funds you receive under the First Home Owner Grant to beef up your deposit, you’ll most likely require at least 5% genuine savings to qualify for a home loan with less than a 20% deposit.

Genuine savings refers to the money saved by you over a period of time (at least three months). A deposit saved over time shows that you have the ability to budget and save. It demonstrates that you’re a responsible borrower who is less likely to default on a mortgage than someone who finds it hard to save money.

In case you don’t have 5% genuine savings, you should at least be able to provide proof of savings for a minimum of three months to improve your chances of approval. In case you are renting, a few lenders will even waive the genuine savings requirement if you have a strong rental history spanning six months or more. Speaking to a mortgage broker could help you better evaluate your options.

The cost of buying a home in Australia’s capital cities

We crunched the numbers to bring you an estimate of how much you’ll need to save to purchase a house in the most popular Australian capital cities.

If you wish to purchase a median-priced unit in Sydney, you’ll need to save upwards of $41,000 for a 5% deposit and a few thousand dollars to cover other purchase expenses, such as:

• Stamp duty
• Legal/conveyancing fees
• Insurance
• Costs of moving your house
• LMI (if you’re borrowing more than 80% of the property’s value)

Jack and Diana - A case study

Jack and Diana are a hard-working couple in their late-20s. They want to purchase a house with a view to starting a family in a few years. Jack and Diana’s combined gross annual income is $120,000 - a standard income for a couple of their age.

They’re renting but, thanks to their budgeting skills, manage to save about $15,000 annually, which is approximately 20% of their take-home income.

If Jack and Diana want to buy a $675,000 house, which is the median dwelling price in Australia presently, they’ll need to save a 20% deposit amounting to $135,000.

They’ll also need funds to pay for stamp duty and other costs, meaning they might need up to $150,000 to cover all costs.

Jack and Diana have never owned a house before so they are eligible for a First Home Owner Grant and a stamp duty concession. But despite the boost provided by the government grant, they still need about $125,000 to put up an ideal deposit, which will take them about eight years to save at their present saving rate.

If property prices rise in the meantime, an increased deposit requirement could set them back a few more years.

So what options do Jack and Diana have?

Jack and Diana have been saving for a few years. They have about $45,000 in their kitty to purchase a home.

Since they don’t want to wait any longer to buy a house, they decide to meet a mortgage broker to help them understand their options.

The mortgage broker informs them it’s indeed possible to purchase a house with a 5% or a 10% deposit. However, there are a few additional conditions that need to be met:

• They either need to pay for LMI, or
• Ask their parents or someone else to guarantee their home loan.

Jack and Diana decide to go with the first option and use an online calculator to work out how much LMI will cost. For a 95% loan-to-value ratio (LVR) home loan, they’ll pay an LMI premium of $26,949. The good news is their broker informs them that they can roll over the cost of LMI into their home loan to reduce the upfront costs at the time of buying.

To give you an idea, LMI is a type of insurance that protects the lender if you default on your home loan repayments. Many lenders ask you to pay for LMI if you’re taking out a high LVR loan. LVR refers to the amount you’re borrowing compared to the market value of your home.

Generally, the lower the LVR, the less risky the mortgage is for your lender, and you’re likely to get favourable loan terms. To manage their risk, some lenders don’t approve high LVR loans amounting to more than 80% of a property’s price. Those who do, prefer to have their risk insured by asking you to pay for LMI.

How can I avoid paying for LMI?

If you borrow more than 80% of a property’s value, your lender will ask you to pay for LMI to insure their risk. Even though LMI costs can run into thousands of dollars, it does help you enter the property market early, giving you more time to build equity and even save on rent money. On the flipside, LMI can significantly add to your loan costs and many borrowers prefer to avoid paying for LMI to save money.

Here are some ways to avoid LMI.

A parent guarantee home loan

One alternative is to ask your parents or another family member to guarantee your home loan. For instance, your parents can use their home equity to secure your mortgage. In this case, if you fail to make your repayments, your parents will be responsible for paying off your loan. If they’re unable to do so, the lender can move to sell the property your parents used for guaranteeing the mortgage.

First Home Loan Deposit Scheme

The First Home Loan Deposit Scheme (FHLDS) is a government initiative that makes it possible for you to purchase your first home with a 5% deposit and no LMI. Eligibility depends upon where you’re buying, the value of the property and your income. Single parents with dependents can purchase a house with a 2% deposit and no LMI under the Family Home Guarantee scheme.

Get a professional discount

Some professionals like doctors, accountants, lawyers and those from the entertainment industry may qualify for an LMI waiver due to their high salaries and the stable nature of their jobs. If you belong to any of these professions, consider speaking with a mortgage broker to find out about the special offers available to you.

Buying a home with someone

If you don’t have a 20% deposit on your own, it’s possible to partner with a friend or family member and purchase the house together. But it’s important to speak with a legal professional before entering into such an arrangement, to understand your rights and obligations.

Pros and cons

There are many benefits of applying for a home loan with an ideal deposit, such as:

• Favourable interest rates
• Lower repayments due to reduced borrowing size
• No LMI costs due to lower LVR

Generally speaking, the larger your deposit, the better. But it’s not easy for most of us to save a 20% deposit and waiting too long can lead to some missed opportunities and regret. If you enter the property market today with a 5% deposit, you have the chance to benefit from the increasing property prices and build your equity faster. On the downside, a smaller deposit does lead to larger monthly repayments and very little equity to start with.

Whether you want to wait it out to save a larger deposit or buy a house as soon as possible by paying a little extra in LMI costs is a decision you’ll have to make.

Can I get a low-interest rate with a low deposit?

While it’s true that the size of your deposit impacts the interest rate you may be eligible for, it really boils down to your overall situation.

For instance, if you only have a 5% deposit but earn a reasonably high salary, you may be eligible for a professional discount or an LMI waiver with some lenders.

A mortgage broker will use your income, clean credit history and strong asset position to negotiate a better deal for you.

How can I save enough money for a house deposit?

Saving a deposit to buy a home can be challenging, but a disciplined approach could take you there faster. While you can always turn to the Bank of Mum and Dad to increase the size of your deposit, simple lifestyle changes to reduce your spending and a sound investment strategy to grow your savings will help you build your deposit faster.