Saving for a deposit is the first step towards getting a home loan approved. But how much deposit do you need? It’s a question that all first home buyers ask. This article answers that question and many more, including:
What is the minimum home deposit?
What are the pros and cons of saving up for a larger deposit?
What government help is available for home deposits?
What are the other upfront costs of buying a property?
The minimum deposit you need for a home loan in Australia is usually 5% of the home’s selling price, though many lenders require you to have 20%. The table below shows you the difference between a 5% and a 20% deposit for different home values.
Saving up for a larger deposit has its pros and cons. Let’s look at the advantages first.
If you can come up with a deposit of 20% or more, you won’t need to pay for lenders’ mortgage insurance (LMI) unless you’re eligible for a federal government guarantee (more on that later in this article).
LMI protects the lender if you don’t make your repayments. It can cost $10,000 or more on an average-sized home loan.
This means that your repayments will be lower, and you’ll pay less interest over the life of your home loan.
The more deposit you have, the more loan products and lenders will be available to you. This increases your chances of negotiating a home loan with the best possible terms and conditions. For example, a loan with a lower interest rate.
The only major disadvantage of saving up for a larger deposit is that you will need to wait longer to buy. Saving up for a larger deposit takes time. A smaller deposit lets you buy sooner. Waiting longer to buy could have two drawbacks:
Property prices tend to rise over time.
Interest rates are currently at record lows in Australia, but many analysts are tipping them to rise in the near future.
If you’re a first home buyer, there are three major government schemes to help you with a deposit if you’re eligible.
They are the following:
First Home Owner Grant
First Home Super Saver Scheme
First Home Loan Deposit Scheme
New Home Guarantee
In addition, if you’re a single parent with dependent children, you could be eligible for the Family Home Guarantee Scheme.
Let’s look at each of these schemes in turn.
The First Home Owner Grant is available to eligible first home buyers in all Australian States and Territories except the Australian Capital Territory (where a stamp duty concession is available instead).
Different amounts are available in each State and Territory, as indicated in the table below.
Each State and Territory government administers its scheme and has its own eligibility requirements. Those requirements include maximum income and maximum value property thresholds.
Some States and Territories also require you to be building a new home to be eligible, while others provide their First Home Owner Grant for buying both new and existing homes.
If you’re a first home buyer, the First Home Super Saver Scheme allows you to withdraw up to $30,000 from your superannuation to use for a home deposit. This amount is due to increase to $50,000 from 1 July 2022.
But it’s important to understand you can only withdraw voluntary contributions that you make. You can’t withdraw the compulsory super guarantee contributions your employer makes on your behalf.
Making voluntary super contributions not only helps you with your home deposit, but it’s also a tax-effective way of investing. Super funds in Australians are taxed at the concessional rate of just 15%, so you’ll pay less tax. You can also claim your voluntary contributions as a tax deduction.
The First Home Loan Deposit Scheme helps you avoid the cost of lenders’ mortgage insurance, provided that you satisfy the eligibility requirements. The federal government guarantees the lender the difference between your deposit percentage and the 20% that lenders require for LMI to not be necessary.
Note that you aren’t given the difference to use as your deposit; you still need to borrow the amount of the federal government guarantee and repay it. The federal government’s guarantee simply removes the cost of LMI from your home loan.
The New Home Guarantee is essentially the same as the First Home Loan Deposit Scheme, except it’s exclusively for buying or building brand new homes.
The Family Home Guarantee allows eligible single parents with dependent children to avoid the cost of LMI, provided they can come up with a deposit of just 2%. The federal government guarantees the lender the difference between the deposit percentage and the 20% required.
Like the First Home Loan Deposit Scheme, the Family Home Guarantee only removes the cost of LMI from your home loan. It isn’t an amount given to you to use for a deposit.
In addition to coming up with your deposit, other upfront costs of buying a home can include:
Lenders’ mortgage insurance (if you can’t come up with a 20% deposit or get a government guarantee assistance)
Conveyancing and solicitor’s fees
Stamp (or transfer) duty (though first home buyer concessions are available in some Australian States and Territories)
Building and pest inspection fees
Loan application fees
Mortgage registration fees
Electricity or gas connection fees
These costs can collectively add up to tens of thousands of dollars.