How Much Do I Need to Buy a House?

Generally, in Australia, lenders expect a minimum deposit of 20% of the purchase price of the property. Lenders may accept between 5% and 20%, depending on the lender, your financial situation and whether it’s your first home. A deposit amount is your contribution to the purchase price, so the more you can pay upfront, the less risk a lender sees in loaning you the remaining amount.

The ratio of borrowing is also known as a Loan to Value Ratio (LVR) and is calculated as follows:

(home loan amount/property value) x 100.

Example: (640,000/800,000) x 100 = 80%.

If a property is worth $800,000 and you borrow $640,000, your LVR is 80%, and your deposit is 20%.

A higher LVR (smaller deposit) usually means a higher risk for the lender and potentially a higher interest rate and LMI.

A lower LVR (higher deposit) usually means less risk for the lender, better interest rates and often no LMI.

Lenders prefer larger deposits as it indicates that you can manage your finances, and it reduces the size of the loan.

If your deposit is below 20% of the property value, you will usually have to pay lender’s mortgage insurance (LMI), which is an extra cost upfront or added to your home loan monthly repayments. This is an insurance that protects the lender if you are unable to pay back the loan.

How is LMI calculated for different deposit sizes?

LMI is a sliding cost that can vary depending on the lender and their chosen insurer, your type of loan, the size of your loan and the value of your property. Usually, LMI costs range between 1-5%, and can sometimes reach up to 6.5%, of the home loan amount. This means that LMI could potentially range between a few thousand dollars and over $30,000, depending on how small the deposit is.

This is a ballpark range of how it could look based on a 5% LMI rate:

For a $500,000 home, the financially stronger route may be to save for a 20% deposit rather than add LMI on top of your home loan. With a 20% deposit, your savings go into the equity of the property, but with a 5% deposit, you do not benefit from the amount you have to spend on LMI.

However, the better option depends on how long it could take you reach this savings amount, as the property market may be increasing over this time. Sometimes, a 5% loan and spending on LMI may be more beneficial as your property value and income may increase while you own the home.

You can pay lenders’ mortgage insurance as a one-off upfront cost or add it to your monthly repayments, which then attracts interest.

A mortgage broker, such as AFMS, can help you model both scenarios to find the path that will benefit you the most. Knowing whether it’s worth buying sooner with a smaller deposit can help you finalise the savings plan you need for your future home.

Home Loan Deposit Reductions

For certain individuals, there are options to reduce the amount you need to save upfront with a lower deposit and zero LMI. These are based on either Government Schemes designed to help Australians get on the property ladder or “professional packages” for certain professions that provide a lower lending risk.

Australian Government First Home Buyers 5% Deposit Scheme

First home buyers can buy a home with only a 5% deposit, and single parents or legal guardians can purchase a home with a minimum 2% deposit. The initiative, also known as the first home guarantee scheme, means that the Government guarantees up to 15-18% of the purchase price, therefore eliminating the need for lenders to add LMI.

There is an eligibility criterion to meet for the scheme, such as citizenship/residency, participating lenders and residential property requirements.

If you meet all the criteria, you could avoid lender’s mortgage insurance and secure a home loan with a smaller deposit. Check out our guide to the First Home Guarantee Scheme.

Lower Deposits for Certain Professions

“Professional Packages” or LMI waivers can sometimes be offered to certain professions with job security and a stable, high income. These careers often mean the individual is seen as a low-risk borrower with a lower default rate and a high chance of being a returning customer. Therefore, the lender’s data-driven calculation allows them to reduce their deposit requirement in favour of a lower-risk loan.

Not all lenders offer these packages, but the most common are:

• Medical professionals: Dentists, doctors, specialists, vets and pharmacists can often secure a home loan with a 5% deposit and no LMI.
• Legal professionals: Lawyers, barristers, and solicitors can usually pay around a 5-10% home loan deposit.
• Financial Specialists: Qualified accountants and financial advisers can sometimes secure a 10% deposit package without LMI.
• Other key workers: Some lenders offer packages for nurses, midwives, paramedics, teachers, police officers and firefighters, qualifying them for a 10% deposit and no LMI.

Not all lenders offer these incentives, and some will have eligibility criteria, such as minimum income, qualification certificates and minimum experience.

Upfront costs to factor in beyond your deposit

It’s always important to be fully aware of all the costs involved in buying your first home, especially when planning out your savings plan. These are some of the additional costs you may need to account for:

• Stamp duty: An upfront cost when buying a home, but first-home buyers may be able to avoid stamp duty with certain concessions.
• Building inspections: Not mandatory in every state, but an inspection is strongly advised and sometimes added as a condition in the purchase contract.
• Legal costs: There may be several legal hoops to jump through, such as contract reviews, title transfers, and mortgage registration fees.

Saving for a house proud future

Being aware of all the upfront costs and the deposit amount you need can be the motivation you need to save for your future home. With our savings goal calculator, we take the stress out of budget spreadsheets and make it easy to keep track of your end goal.