How much deposit do I need for a home loan? This is a common question I'm asked, and in short, there is no definitive answer - it's up to you. It really boils down to your financial situation and how much fees and interest you're prepared to pay to get onto the housing market.
Now the key equation in property lending is as follows: L = P + C - D - G
(L) Loan Required = (P) Purchase Price + (C) Purchase Costs - (D) Deposit - (G) Grants
Reworking this equation to help us work out what deposit we need, the equation becomes D = P + C - L - G
(D) Deposit = (P) Purchase Price + (C) Purchase Costs - (L) Loan Required - (G) Grants
Let's use an example to demonstrate this:
- You've found a unit in Perth that you would like to buy and the purchase price is $430,000.
- WA Stamp duty for the purchase is $14,440.
- You're expecting a further $3000 in purchase costs such as settlement costs, pest & building inspections etc...
- You're not a first home buyer - so no First Home Owner's grant or reduced rate of Stamp Duty.
How much deposit will you need?
Using our equation Loan Required = $430,000 + $17,440 - Deposit - $0
Here are your main options:
Option 1. 20% or more of the purchase price + purchase costs. This really is the magical figure in home lending. Nearly all lenders in the Australian home lending market will lend up to 80% of the purchase price or property value (lenders will lend against the lesser of the two values if they differ) without charging Lenders Mortgage Insurance (LMI). So if you have a 20% deposit + costs, then you are in business. If you are self-employed and you don't have the full array of documentation (low doc), then lenders generally require a larger deposit.
So in our scenario above, we know the lender will lend up to $344,000 (80% of $430,000) without charging LMI (assuming we meet all of other lending criteria).
Deposit Required = $430,000 + $17,440 - $344,000 (80% of $430,000) - $0 = $103,440
With a deposit of $103,440 and a home loan of $344,000, you can purchase the $430,000 property.
Option 2. 5% - 20% of the purchase price + purchase costs. If you can't save 20%, don't panic. The majority of Australian lenders will still lend up to 95% of the property value, but they will charge you Lenders Mortgage Insurance. Lenders will perceive you as increased risk of defaulting on your home loan if you have to borrow more than 80% of the value of the property and as such they will force you to pay LMI, which only protects them (not you) in case you default on paying your home loan repayments.
In our scenario, let's assume you'll target to borrow 90% of the property value.
Deposit Required = $430,000 + $17,440 - $387,000 (90% of $430,000) - $0 = $60,440
You'll also have to pay LMI, which in this case will approximately be $8,250. You have a choice of paying this fee immediately or adding the fee onto your home loan (AKA capitalising LMI)
With a deposit of $60,440 and a home loan of $395,250 ($387,000 + $8,250 capitalised), you can purchase the $430,000 property.
Option 3. 2% of the purchase price + purchase costs via Keystart. Keystart Home Loans was established in 1989 by the WA Government to help eligible West Australians achieve home ownership. Keystart offers a number of low-deposit home loans with the lowest minimum deposit required being just 2% of which 1% needs to be genuine savings - all without the need to pay LMI! There are a number of stringent criteria that need to be met in order for you to qualify for a Keystart Home Loan, but we'll assume for this example, that you qualify.
In our scenario, 2% of the $430,000 property is $8,600
Deposit Required = $430,000 + $17,440 - $421,400 (98% of $430,000) - $0 = $26,040
With a deposit of $26,040 and a home loan of $421,400, you can purchase the $430,000 property.
Option 4. 0% of the purchase price + purchase costs via a Guarantor home loan. If you're lucky enough to have a close family member with substantial equity in their home, then you could ask them to act as a security guarantor for your home loan. If they agree, then the lender will use their property as additional security and this will enable you to borrow in some cases up to 105% of the property value without the need for a deposit. Another great benefit of having a security guarantor is that this eliminates the need to pay LMI as well.
In our scenario, let's assume you'll target to borrow the full amount + the purchase costs.
With a deposit of $0 and a home loan of $447,440, you can purchase the $430,000 property.
As you can see, there is no set answer as to how much deposit you need for a home loan - but I would always say - save as much as you can, as the more you can save the better - here are some reasons why:
- The larger the deposit, the less you have to borrow and the smaller your home loan repayments will have to be.
- If you can save enough deposit for 20% of the property value + associated costs, then you can avoid having to pay Lenders Mortgage Insurance. LMI can cost thousands and is a fee that is best to avoid ideally.
- Lenders often charge higher rates of interest to those borrowing at higher Loan to Value ratios (LVR - simply the loan divided by property value). For example, if you have a 79.9% LVR you can borrow at 4.5%, but if you have to borrow with an LVR of 85%, then a lender may charge an interest rate of 4.65%.
Want to talk more about your home loan options?
If yes, then please get in touch with me today and I'll be happy to help. All my home loan and mortgage services (from the initial meeting, right through to home loan settlement) are completely free to you.