Written by When you’re in the process of getting approved or pre-approved for a home loan, one of the first questions you’ll be asked is how much you’re paying as a deposit. So, how much do you need? And how do they work?
We’ve unpacked home loan deposits in this comprehensive guide, as well as explained a few common terms you might’ve heard before (LVR, LMI and more), so you can enter the home loan process armed with all the info you need!
First and foremost, what is a home loan deposit and how do they work?
A home loan deposit is the part of your home purchase that’s paid by you with your savings. This makes up the difference between the property’s price and the amount you’re borrowing from your bank or lender to complete the purchase.
You won’t be able to buy a home without chipping in with any of your own money, though there are some exceptions (which we’ll discuss a bit later), so a deposit is almost always necessary.
As part of the purchase, you’ll have to pay a portion of your property’s price upfront to secure it, which is typically between 5% and 10%. If this is only part of your deposit, you’ll pay the remainder at settlement to complete the sale.
How much do I need to pay for a home loan deposit?
In general, a deposit worth 5% of the purchase price is usually the absolute minimum you can pay on a home. However, in some cases, this may be as high as 20% or more if they see you or the property you’re buying as a risk. Here are some examples of when that might happen:
- You have a bad credit score
- Properties in the suburb or postcode you’re buying into are deemed higher risk due to trouble selling
- You’re using a bridging loan to buy your new home before the sale of your old one settles
It’s important to compare your options before you apply so you can maximise your chances of locking in a lender that can support the LVR that you’re looking for. That’s where Savvy can help you out.
You’ll have all the comparisons done for you so you can be hooked up with the best available offer for your needs. Once you submit an enquiry through us, we’ll get to work looking for a home loan product that suits your requirements from our panel of trusted lenders!
So, I can use any money I have as a deposit for a home purchase?
Well, not quite. Even if you have a sizeable deposit for your home purchase, some lenders may not accept it. What gives? That might be because they don’t consider it to be genuine savings. Here are the differences between genuine and non-genuine savings:
Genuine savings
Genuine savings are those that you’ve clearly and gradually built over time. This is most often from your standard savings account but may also come from term deposits, shares or home equity. Holding savings for at least three months usually makes them genuine in the eyes of a lender.
Non-genuine savings
If you’ve received a gift from your parents or a recent inheritance, you may not be able to use the funds towards your home loan. This may also be the case for non-property asset sales, such as vehicles and shares, and annual bonuses from your job. However, as mentioned above, these can become genuine if you leave them for at least three months, therefore becoming home deposit-eligible.
What is LVR?
LVR stands for loan to value ratio. This is a percentage figure that represents how much of your home’s purchase price will be borrowed from the bank. Let’s take a quick look at how this works:
- You purchase a $1 million home
- You provide a $300,000 deposit and the remaining $700,000 is to be paid by the bank
- To calculate LVR, simply divide the loan amount by the total price
- $700,000 ÷ $1,000,000 = 0.7
- 7 x 100 = 70% LVR
As you can see here, the LVR is impacted by the size of the deposit you pay. In the above example, chipping in an extra $50,000 would lower the LVR to 65%, while cutting the deposit back to $200,000 would mean your LVR is 80%.
Also, following on from the earlier question about how much you need to deposit, lenders will typically cap their LVR limit at no more than 95%, but there may be situations where 80% LVR or less is the maximum available to you.
Why is LVR so important?
The reason why lenders place so much emphasis on LVR is because it’s one of the key indicators of risk on your home loan. Lenders view all loan applications, not just home loans, through the lens of risk; essentially, they want to be confident that there won’t be any issues for you when you’re repaying it.
For that reason, they’ll always prefer lower LVRs wherever possible, as this reduces the amount of money they’d have to recoup if you became unable to pay off your loan. That’s why lenders only offer 100% LVR loans in very specific situations: in most situations, all the risk would be on them and the borrower wouldn’t be putting any of their own cash towards the purchase.
Does the size of my deposit affect my home loan’s interest rate?
Yes, it can. Lenders are more likely to offer you a better rate on your loan if your LVR is lower, as your risk profile will also be lowered. On the flip side of that, borrowers with a higher LVR, such as those over 80%, generally won’t be able to access the minimum available rates.
That’s part of the reason why paying a larger deposit where possible can be a good thing, as it’ll not only save you money (more on that in a bit) but also potentially help you gain access to more competitive rates.
How much can I really save with a larger deposit?
An excellent question! The amount you can save with a bigger deposit will depend on a range of factors, like the value of the property, your interest rate, the length of your home loan and more. However, for simplicity’s sake, we’ve drawn up the following table based on a property worth $800,000. See how much the size of the deposit impacts the overall interest here:
| Loan amount | LVR | Deposit | Loan term | Interest rate | Monthly payments | Total interest paid |
|---|---|---|---|---|---|---|
| $640,000 | 80% | $160,000 | 30 years | 6.15% p.a. | $3,899 | $763,662 |
| $600,000 | 75% | $200,000 | 30 years | 6.15% p.a. | $3,655 | $715,933 |
| $560,000 | 70% | $240,000 | 30 years | 6.00% p.a. | $3,357 | $648,694 |
| $520,000 | 65% | $280,000 | 30 years | 6.00% p.a. | $3,118 | $602,359 |
| $480,000 | 60% | $320,000 | 30 years | 5.85% p.a. | $2,832 | $539,418 |
Calculations don’t include additional fees and set-up costs on your home loan. These are for illustrative purposes only and aren’t indicative of the interest rates and terms you’ll receive on your home loan.
As you can see, with an extra $40,000 paid upfront, you could save a significant amount on interest, as well as access a lower rate. The results speak for themselves!
Of course, not everyone is in a position to bump up their deposit by that much, so let’s take a look at this on a smaller scale so you can notice how much you’ll still be saving:
| Loan amount | LVR | Deposit | Loan term | Interest rate | Monthly payments | Total interest paid |
|---|---|---|---|---|---|---|
| $640,000 | 80% | $160,000 | 30 years | 6.15% p.a. | $3,899 | $763,662 |
| $635,000 | 79.4% | $165,000 | 30 years | 6.15% p.a. | $3,869 | $757,696 |
| $630,000 | 78.8% | $170,000 | 30 years | 6.15% p.a. | $3,838 | $751,729 |
| $625,000 | 78.1% | $175,000 | 30 years | 6.15% p.a. | $3,808 | $745,763 |
| $620,000 | 77.5% | $180,000 | 30 years | 6.15% p.a. | $3,777 | $739,797 |
Calculations don’t include additional fees and set-up costs on your home loan. These are for illustrative purposes only and aren’t indicative of the terms you’ll receive on your home loan.
Even with an additional $5,000 tacked onto your deposit, your total interest paid would fall by a bit less than $6,000. Although this may not seem important in the scheme of things, every dollar counts when you’re saddling yourself with a massive debt like a home loan.
What costs does LVR include?
Well, it does what it says on the tin: loan to value ratio. None of the other costs you’ll need to budget for as part of your home purchase are automatically included in the LVR. This means that stamp duty, title transfer fees, conveyancing fees and other loan fees will all need to be budgeted for on top of your loan amount.
However, banks will allow you to cover steep upfront charges like stamp duty and conveyancing fees in your home loan, so if you’re in talks with the bank about taking one out, they’ll be able to include these fees in your loan amount.
What is lender’s mortgage insurance and what does it have to do with LVR?
Lender's mortgage insurance, more commonly known as LMI, is a type of insurance you’ll typically have to pay for if your LVR is above 80%. These are considered the riskiest loans by lenders, so they take out insurance to cover themselves in case the borrower defaults on the loan.
For borrowers looking at taking out a loan above 80% LVR, LMI is a costly added expense you’ll need to budget for. You can expect it to set you back thousands of dollars, or more than $10,000 on larger loans, on top of all the other costs.
How is LMI calculated?
The LMI premium you’ll have to pay can be based on a variety of factors, such as:
- Your loan amount (and therefore your LVR)
- The size of your deposit
- Whether your property will be owner-occupied or an investment
- Whether you’re employed and paid on a PAYG basis or self-employed
On top of these, you’ll also find that different lenders may have different ways of calculating and charging LMI. This may be based on the insurer and policy they go with to cover your home loan. When you apply for your home loan through Savvy, you can discuss your situation with an experienced broker to find out what you might be paying in LMI.
Is there any way to avoid paying LMI if my deposit is less than 20%?
Yes, it is! Even with a deposit under 20%, there are ways around paying LMI. Here’s how you might be able to do it:
- Apply with a guarantor: having your parent, grandparent or another close relative sign on as a guarantor could reduce your LMI to $0. That’s because a guarantor is agreeing to take on the loan if you become unable to pay it, adding an extra layer of security for your lender.
- Apply for a government grant or scheme: if you’re a first-time buyer, you may be eligible for the First Home Guarantee through Housing Australia, which enables you to purchase your home with as little as a 5% deposit without having to worry about LMI.
- Apply with a specialist lender: although most do charge LMI, some specialist providers don’t. Take the time to consider your options before you sign on the dotted line.
- Work in an approved field: certain professions may qualify for LMI waivers, such as doctors or lawyers.
Is it possible to get a 100% LVR home loan with no deposit?
Believe it or not, it may actually be possible for you to get formal approval for a loan worth 100% of your property’s purchase price! The main way to do this is through a guarantor. In this case, the loan uses equity in your guarantor’s property instead of a cash deposit from you.
However, both you and your guarantor will need to pass strict eligibility criteria. For instance, you both must have a strong record of keeping up with your finances, while guarantors must have sufficient equity in their home to meet your lender’s requirements.
The only other way to take out a home loan with no cash deposit is if you use equity in your own property. This obviously only works if you already own another property, with equity able to be accessed by refinancing your current property to take money out.
Can I use the First Home Owner Grant towards my home purchase?
Absolutely! The First Home Owner Grant (FHOG) is available in all states and territories of Australia (or the Home Buyer Concession Scheme in the ACT) and can offer eligible applicants between $10,000 and $50,000 towards their home purchase depending on where they live.
The most common way for these funds to be used is by adding them to your deposit or paying them straight into your home loan account. If you’re unsure whether you’re eligible, check your state or territory government’s website.
What’s a deposit bond and can I use one?
A deposit bond is essentially an insurance policy taken out that guarantees the payment of your deposit to the vendor by a set date that’s agreed upon between the two parties. These typically cover up to 10% of the purchase price of your home, so they’re intended to be used to secure a property in place of an upfront deposit if you don’t have the funds available.
However, these aren’t generally an option for first-time buyers; instead, they’re designed for people who already own a place and are waiting to sell it before buying their new one. It’s an alternative to bridging finance, which can be expensive (especially if the sale of your current property drags out).
So, how much should I pay as a deposit?
The answer to that question depends entirely on your situation. Chipping in more money upfront could save you a massive amount in interest overall, but you also want to keep enough savings in the bank so that you can leave a bit of wiggle room for all the other costs that come with buying a house.
Ultimately, what you should prioritise is your comfort. Overburdening yourself and risking financial hardship is something you should avoid at all costs. When you apply through Savvy, we’ll take you through the process step-by-step to maximise your chances of approval for the right loan!
