How Much Deposit Is Required for a Home Loan?
6-MINUTE READ
Purchasing a house seems to get more and more complicated each year. Knowing how much deposit you need will make it far easier to get your home loan approved and buy your investment property in Australia.
Why Does the Size of Home Loan Deposit Matter?
Generally speaking, the size of your deposit impacts the home loan amount, interest rates, and other loan terms. Let’s examine the reasons your deposit matters.
- It informs the lender of what you can afford
To save up for a deposit, most homebuyers have to make regular payments into a savings account over a period of months (or even years). This gives the lender an idea of your ability to keep up with home loan repayments. The lender will consider your deposit along with other income, like salary or investments, to assess how much money you can borrow.
Use our mortgage repayment calculator to work out roughly what you’ll be paying each month.
- It impacts interest rates
The bigger your deposit, the more power you have to negotiate interest rates. Plus, you’ll have a wider range of lenders to approach, meaning more choice. It’s worth asking your lender whether you can secure lower rates with a bigger deposit.
- You pay less interest
A deposit that is 20% of the property value means that you only have to borrow 80%. Therefore, you have less to pay off in the future, so less interest will build upon the principal. You might save significant amounts with a higher deposit.
As an expat, lenders are already hesitant to offer you good loan terms or large amounts of money. A sizable deposit will improve your chances of getting approved and securing good rates. Here at Odin Mortgage, we specialise in expat home loans; get in touch with our team today.
Get a free Australian mortgage assessment today.
Knowing Your Borrowing Capacity
How much you can borrow depends on your borrowing power. Several factors contribute to your borrowing capacity, one of which is your deposit size. Your income, living expenses, credit score, and credit card limits contribute to your borrowing capacity. Use our borrowing calculator to find out how much you can borrow.
Loan to Value Ratio (LVR)
Lenders assess how risky you are based on your Loan to Value Ratio (LVR). The LVR is calculated by taking away your deposit from the property price, which equals the loan amount.
Divide the loan amount by the property value to get the Loan to Value Ratio. For example, if you want to buy a property worth $1,000,000 with a deposit of $300,000, the LVR would be 70%.
An LVR of 70% would be very good for an expat. However, most lenders will accept an LVR as high as 95%, but they might require you to pay Lenders’ Mortgage Insurance (LMI) for any LVR higher than 80%.
Lenders' Mortgage Insurance (LMI)
Lenders’ Mortgage Insurance is an additional one-off payment required if your LVR is above 80%. As the lender assesses the borrower to be a higher risk, the insurance covers their back if the borrower defaults on a payment.
It can become quite a costly addition to the home purchase. Usually, the LMI is capitalised on the loan, so your interest payments also increase. Also, you can’t transfer LMI to a new loan if you refinance and might end up having to take out another policy with the new lender.
To avoid paying LMI, it’s best to save at least a 20% deposit.
What Counts Towards Your Home Loan Deposit?
Many people think that your house deposit needs to be made up of cash savings. However, several other finances can count towards your deposit and improve your borrowing power.
- Genuine Savings
Firstly, the most obvious kind of home deposit is genuine savings paid into an account for at least three months. Genuine savings are considered evidence that you can maintain monthly repayments on your home loan and are, therefore, less risky. Most lenders want to see a cash deposit of at least 5%-20% of the price of the property.
- Investments, shares, or equity
The deposit required for a home loan doesn’t have to just be cash savings. Most lenders will also consider at least three months evidence of shares, term deposits, or inheritance held in an account as proof of your ability to repay the mortgage.
Plus, you can also use the equity in other properties to boost your deposit.
- Cash gift
Gifts of money from an immediate family member to help you get into the property market can also help you secure a home loan. Lenders will want evidence that the money is a gift, not a loan that you are expected to repay to the family member.
- Rent payments
Some lenders might consider your rental history as evidence of your ability to repay the home loan. Usually, the borrower must still be renting when applying for the loan and have a minimum of 12 months with a single property.
However, remember that not all lenders accept this form of deposit. Those that do often require additional evidence of genuine savings, such as a cash gift from a family member.
Get a free Australian mortgage assessment today.
Other Costs
On top of your deposit, there are usually other costs that come with buying a house, such as stamp duty. So, when you’re saving up 20% of the purchase price, consider making a savings plan for the other upfront costs you’ll need to pay.
Stamp Duty
Unfortunately, as an Australian citizen jointly buying property from overseas with a foreign national, you will be required to pay a stamp duty surcharge. This will be applied to the foreign national’s % ownership of the property’s value. The stamp duty surcharge is an additional 7-8% (depending on the State) on top of the 4-5% stamp duty you’ll already be paying.
For a property priced at $1,250,000, you could be paying $50,000 in additional stamp duty surcharge.
$1,250,000 * 50% (if jointly owned) * 8% = $50,000
However, as an expat home buyer without a foreign spouse, you will only have to pay the standard 4-5% surcharge. When working out your borrowing power, it’s worth considering this extra cost – use our stamp duty calculator to estimate how much extra you might need to save.
Legal Costs
Home buying, unfortunately, comes with additional legal fees. Your solicitor will take care of the sale and transfer of your property. You can expect to pay around $2000 in legal fees; however, this will depend largely on the property value.
Mortgage Fees
Other upfront costs include mortgage fees. This expense differs from lender to lender and whether you use a broker. Make sure you understand the lending criteria of your loan product and whether fees and charges apply.
Tips for Expats to Save a Bigger Deposit
So, now you’re looking at saving around a $200,000 deposit to buy your $1,000,000 property in Australia. It’s not unfeasible. Here are some tips to help you save:
- Reduce your bills
In today’s society, we’re all spending expenses on subscription services or phone bills. Try to spend less money on these sorts of ongoing costs, even if it’s just for a year or so. Similarly, consider if you can reduce your bills in other properties – can you lower your energy tariffs?
Put the extra savings into an account specifically for your deposit and try not to touch it.
- Cut down everyday spending
This might be easier said than done. When you’re out for lunch, the difference between a few dollars might not seem much. However, it can add up. Instead of always picking the cheaper option, try to limit your meals out. Or, if you often catch a taxi, try using a bus or walking. You’ll be amazed by how much you can save by changing a few daily habits.
- Consider high-interest savings accounts
Rather than putting your extra money into a regular bank account, seek appropriate professional advice about saving account options. High-interest accounts will enable you to make money for your house deposit without lifting a finger.
Get a free Australian mortgage assessment today.
Final Thoughts,
Really, with the right lender or mortgage broker, you can probably find a home loan with any size deposit. However, you should bear in mind the additional costs, such as LMI or a higher interest rate, that come with a smaller deposit.
Frequently Asked Questions
How Much of a Deposit Do I Need for a Home Loan?
Most home buyers are advised to save around 20% of the property value. However, many lenders offer loans to people with a deposit of as little as 5%, but often fees and charges apply. As an expat, the bigger your deposit, the better positioned you are to negotiate your home loan.
Can You Buy a House With Less Than a 10% Deposit?
Some lenders accept deposits of less than 10% for home loans. However, as your Loan to Value Ratio (LVR) will be 90% or above, the lender will require you to pay Lenders’ Mortgage Insurance (LMI). This additional expense will likely work out more costly in the long run. To avoid paying LMI, it’s best to save around 20% of the property price.
How Much Money Should You Have Before Buying a House?
How much money you need depends largely on the type of house you’re buying, the lender, and other financial commitments you might have.
On top of your 20% deposit, you’ll need to pay stamp duty (plus the surcharge if you’re jointly buying with a foreign national), moving costs, legal fees, and other potential expenses. Review your personal circumstances and how much you can feasibly save.
What’s the Lowest Deposit You Can Put On a House?
The lowest deposit you can put on a house is about 5% of the property price. If you’re struggling to increase your savings, consider whether you meet the eligibility criteria for a homeowner grant or if a family member will help you. Usually, a deposit of around 20% is recommended.
See What You Qualify For
