Saving a large deposit for a home is usually harder than paying a mortgage, especially if you’re paying rent and saving at the same time.
Saving a 20% deposit for a median-priced house in Sydney could take around 13 years; in Melbourne, about 11 years. What’s more, house prices will usually be rising while you are saving for a deposit. So it can feel like the goalposts are constantly moving farther away.
How much deposit do I need for a home loan?
As a general rule, you can borrow up to 95% of the property value – although there are exceptions to this – which means you’ll need a minimum deposit of 5%. For example, if you’re purchasing a property worth $500,000, you’ll need at least a $25,000 deposit in most cases.
Take a look at the minimum deposit you’ll need for different property prices:
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Making a larger deposit tends to save you money in the long run. For one thing, if you borrow over 80% of the property value, the lender charges a one-off fee known as Lenders Mortgage Insurance (LMI).
This fee can often be added to the loan, so it doesn’t necessarily mean you need to save more money but it amounts to thousands of dollars.
Besides the LMI, you need to cover expenses such as stamp duty, a few other government fees and the cost of a conveyancer or solicitor.
As an estimate, these fees total around 4%-5% of the property’s purchase price and vary depending on the state you’re buying in and whether you are a first-home buyer. Use the Property Purchase Costs Calculator on our website to get an estimate.
Adding the deposit and other upfront costs together, you usually need about 9%-10% of the purchase price in the bank to buy a home. Note that this is only a rough guide.
That can be a lot of money, but there are ways around this.
How much deposit do first-home buyers need?
There are certain benefits for first-home buyers. They vary between states and they change quite often.
First-home benefits can include:
- Waived stamp duty
- First Home Owners Grant (FHOG)
- A grant for building a home or buying a newly built home
Please be aware that some states offer all of these, while some have none.
Because of these benefits, first home buyers often can pay a smaller deposit.
Home Loan Experts’ team of mortgage brokers can let you know if you’re eligible for the benefits and calculate the deposit you’ll need.
You can also visit https://www.firsthome.gov.au/, which links to the first home buyer website for each state. Or use our Property Purchase Costs Calculator, as this covers first-home benefits as well.
Can I buy a house with no savings?
There are some lenders that offer a ‘non-genuine savings’ loan if you meet their criteria. However, conditions may apply.
The best way to borrow 100% of the purchase price with no savings is by using parents as guarantors.
Different lenders have their own criteria when it comes to the source of the deposit.
Please call us on 1300 889 743 or enquire online to speak to a specialist mortgage broker to see if you can qualify for a home loan without genuine savings.
Let’s look at how you can buy a house sooner and explore the 10 secrets you can use to buy with a small deposit or none at all.
Secret 1: Get A Guarantor Loan
In my opinion, a guarantor loan is the best option for people to get into the property market.
- You don’t need a deposit at all.
- You can borrow 105% of the property purchase price.
- You get a low interest rate, just like borrowers with a 20% deposit.
- You pay no LMI.
- Your parents don’t have to give you any money.
You can buy now and save tens of thousands of dollars.
Here’s how it works.
- Your parents, or another family member, must own a property in Australia.
- The lender takes a limited guarantee from your parents and a mortgage on their property secures the loan.
- When you’ve paid down your loan or your property has gone up in value, you can remove the guarantee. This is possible when you owe less than 80% of the value of your property and normally takes 3-5 years.
Only some lenders offer guarantor loans and they all have different rules. For example, some lenders won’t allow a guarantor loan if your parents have a mortgage on their property, whereas others accept a second mortgage behind another lender. Some lenders require your parents to be working and others don’t.
The banks won’t approve a guarantor loan if they believe you are a high-risk borrower. But you can reduce the risks by:
- not getting any more loans like a credit card, car loan or personal loan
- getting life insurance, total and permanent disability insurance, and income protection, so if you get into an accident, your parents are not at risk
- paying more than the minimum repayment so you can remove the guarantee faster
Use the Home Loan Experts guarantor loan calculator to see if you qualify. We recommend parents only go guarantor if they feel comfortable.
If you and your partner are thinking of getting a guarantor loan as a couple, it’s important to consider what you will do in the unfortunate event that you split up while you are still making repayments. It’s unpleasant to think about, but It’s crucial to account for the worst-case scenario and plan out what you would do.
Say your parents guarantee your home loan and your partner has a much higher income than you. If they decide to stop contributing to repayments on the mortgage, this could put you and your parents in a tricky spot. You and your partner should talk to a legal representative if you have decided to go down this path.
Secret 2: Other Ways Mum And Dad Can Help
Did you know that more than half of first-home buyers get help from their parents?
Apart from guarantor loans, there are two common ways your parents can help you get a home loan:
- Give you a gift to use as a deposit
- Give you a loan to use as a deposit
Secret 3: Get A Gifted Deposit
In most cases, a gifted deposit must come from your parents or another family member. A few lenders can accept a gift as a deposit as long as you have a history of paying rent on time. And other lenders will consider a gift to be genuine savings if you leave it in your bank account for three months.
The lender will require a letter confirming the gift details and some will need to see the funds in your bank account. On the Home Loan Experts website, we have a page with gift letter templates that match what lenders need.
If you are buying as a couple, get legal advice before accepting a gift because if you go your separate ways and then sell the property, it may be a grey area as to who gets the money.
Secret 4: Look Into A Loan From Anyone In Your Family
An alternative to a gift is where your parents or another relative lends you a deposit. There are many ways to do this. In most cases, there’s no interest and you just pay back the loan when you can. Typically, after 3-5 years, your property will have gone up in value and you can refinance your loan to release equity and repay the loan.
If the plan is to make regular repayments to your family, this might affect your borrowing power, as the lender would need to make sure that you can afford those repayments along with your mortgage.
A solicitor can draw up a formal loan agreement for you and secure the loan on the property you are buying. More couples do this than people borrowing on their own.
Some lenders will not accept borrowers who have no savings or who borrowed part of their deposit. However, if you apply with the right lender, you’ll get approved with a competitive interest rate.
Secret 5: Personal Loan As A Deposit
Using a personal loan as your deposit isn’t suitable for most people and lenders rarely approve such loans. However, it could work for you if you:
- have a high income
- don’t have many debts like credit cards or car loans
- have some savings of your own
- are buying a property that you can easily afford.
A personal loan tops up your deposit, rather than supplying the whole thing.
You may incur a higher interest rate on your home loan if you choose this option but if the property market is rising quickly, it’s cheaper to use a personal loan as part of a deposit than to wait to save a bigger deposit.
Secret 6: 100% Home Loans With No Guarantor
Some lenders offer 100% loans with no guarantor. The criteria to get approved is extremely strict, they usually have much higher interest rates and they aren’t always available.
If the economy looks uncertain, lenders will withdraw this type of loan and bring it back years later. For example, in 2020 and 2021, these loans have not been available.
This option doesn’t work for most people as it was targeted at industry professionals. To be eligible for this type of loan, one should have a University degree and 3 years of minimum working experience in the same industry.
Secret 7: Use A Property You Already Own
You usually don’t need to save a deposit if you already own a property.
You can refinance your existing loan to release equity and you can use that as your deposit to buy another property. Refinancing every few years is how many property investors build a large portfolio.
Secret 8: Genuine Savings Doesn’t Always Have To Be Genuine Savings
Lenders like to see that you have saved your deposit yourself, which is known as genuine savings. It shows the lender that you are financially responsible.
Typically, lenders want to see 5% of the purchase price held in your bank account for more than three months and that the balance is increasing, which indicates you’re saving more money.
But some lenders don’t need to see genuine savings. They may consider shares as genuine savings. A few lenders can accept a gift as a deposit as long as you have a history of paying rent on time. And other lenders will consider a gift to be genuine savings if you leave it in your bank account for three months.
The concept of genuine savings can be complicated. If you’d like to know more, speak to one of our mortgage brokers. I’d suggest opening a savings account and making regular contributions to it. You’ll have more lenders that can approve your loan.
Secret 9: Know Your Maximum Purchase Price
Two things determine your maximum purchase price as a rule of thumb:
- How much you can borrow
- The size of your deposit
Say you’re not a first-home buyer and you need 10% of the purchase price in savings to cover the deposit and fees. If you have $50,000 in savings, divide that amount by 0.1, and you get a maximum purchase price of $500,000. Assuming your income supports the loan size, that’s your maximum purchase price.
Usually, Home Loan Experts’ mortgage brokers calculate this for you.
Secret 10: Know When To Buy And When To Save
Sometimes our customers decide to save a larger deposit, rather than pay LMI. Or, sometimes they are in a difficult situation and the only lenders that can approve them have a higher rate.
Let’s say prices are going up by 10% a year. For a $1,000,000 home, waiting a year will cost you $100,000 more. So if the property market is rising, it’s usually best to buy now, even if the loan is more expensive and you pay LMI. If the market is steady or falling, it’s OK to wait.
We have a Buy Now Or Save More Calculator on our website to help you see which option is better for you.
Let us help you decide!
Still not sure how much deposit you need to buy your dream home? One of our Home Loan Experts can help you figure out.
To speak with one of our mortgage brokers, call 1300 889 743 or complete our free, no-obligation assessment form.