How much deposit do I need for a home loan?

The amount you can afford to save for a home loan deposit can have a big influence on how much you can borrow and how much you need to pay in interest and set-up costs. We take a look at some of the things you need to be aware of when saving for a deposit.

A home, whether it’s a house or an apartment, is probably one of the most expensive things you’ll ever buy. Most people need to take out a home loan (sometimes called a mortgage) and for that you’ll generally need a deposit.

A deposit is a percentage of the purchase price or value of the home you hope to buy and is money you typically need to save upfront.

Before you can work out how much deposit you need – or if the savings you already have are enough – it’s a good idea to work out how much you can actually borrow. Then it’s a matter of working out how much of a deposit you would need to have saved, if you were to take on a home loan to buy a property in your desired location.

How much can you borrow for a home loan?

Perhaps the biggest impact on how much you can borrow is how much you earn, save and spend. A number of factors can have an influence, such as whether you have children or not, and if so whether you’re a single-income parent or have a partner who has an income, plus what your saving and spending habits are like. For example, if you or your partner have a poor credit rating, a lender may view your joint home loan application less favourably.

You can use Canstar’s Home Loan Borrowing Calculator to help work out how much you might be able to borrow. Keep in mind that the actual figure may vary depending on, for example, your chosen lender.

Take this hypothetical example:

The Australian Bureau of Statistics says average weekly earnings for adults in November 2021 were about $1,750, or about $91,000 a year.

According to the Canstar Home Loan Borrowing Calculator, a single person earning that amount would potentially borrow up to $559,000 for a loan at 3% over 30 years.

The same person in a relationship with a partner who doesn’t work and with two children would potentially be able to borrow up to $367,000. If the partner earned $900, about half the average weekly earnings, this would go up to $851,000.

But these figures are based on average Australian annual expenses for a household and don’t take into account any extra payments you may have, such as for a car loan or credit card. They are also based on interest rates which can change over the period of your home loan.

Once you get an idea of how much you can realistically afford to borrow, without getting into any mortgage stress, then you can work out how much you need for a deposit.

How much deposit do you need for a home loan?

Most lenders require you to have some savings to put forward as a deposit towards buying your home. They may also want to know about your spending habits and credit score, so it’s a good idea to get these in check before you approach any lender or mortgage broker.

There are fees and other costs associated with buying a home, and you may need to save some money to pay these upfront, too. That could impact the amount of money you have available for a deposit. These costs can vary between lenders and locations.

→ Learn more: Upfront costs of buying a home in each capital city

Lenders generally like you to have at least 20% of the purchase price of a property as a deposit. Anything less than this and you may have to pay Lender’s Mortgage Insurance (LMI). Typically, this is required to either be paid upfront, from your savings, or it is capitalised into your home loan, meaning you pay it off over time along with your home loan.

Keep in mind there may be government schemes you are eligible for that could mean you might not have to pay LMI, such as the First Home Guarantee Scheme (formerly the First Home Loan Deposit Scheme (FHLDS)) or Family Home Guarantee. You may also not be required to pay LMI if you apply for a home loan with a guarantor. Some lenders also offer LMI discounts.

While there are some lenders that may allow you to add LMI to your loan, it could be a good idea to calculate how much this might cost you in the long run, as you would also pay interest on such a sum over the term of your loan.

LMI is designed to protect the lender if you, the borrower, get into a situation where you default on the loan. LMI does not protect your interests if you can’t keep up with the loan repayments. For that, you’ll need to consider taking out mortgage protection insurance.

Why the 20% threshold? Industry sources told Canstar that’s largely down to a commercial decision by banks and other lenders, and is calculated on a case by case basis. You may be required to pay LMI even if you have a deposit of 20% or more, depending on your circumstances and a lender’s policies.

But there are some ways you may be able to get your LMI reduced or even waived altogether, so it could be a good idea to shop around and negotiate with several potential lenders. You can compare home loans with Canstar.

Some lenders, such as Bankwest, Westpac and St.George, have online tools that can help you work out any potential LMI amount. Insurance provider Genworth also has an online LMI calculator that can help you to estimate what you might expect to pay. Canstar has various home loan calculators you may find helpful.

For first home buyers, we’ve crunched the numbers to produce a general guide on how much LMI you could be required to pay, depending on how much deposit you have saved.

First home buyers: How much will I need as a deposit and for LMI?

Know how much you want to spend on your property? We cover how much money you’ll need for a deposit and LMI.

The calculations, from Genworth LMI premium calculator, do not include other loan costs that may also need to be paid up front, such as stamp duty, home loan application fees and conveyancing costs.  We haven’t included those costs because they can vary significantly depending on the borrower’s personal circumstances. It could be a good idea to seek independent financial advice.

→ Related: Mortgage deals & sign-up incentives for first home buyers

Deposit & LMI for $300,000 property

← Scroll sideways →

Deposit & LMI for $400,000 property

← Scroll sideways →

Deposit & LMI for $500,000 property

← Scroll sideways →

Deposit & LMI for $600,000 property

← Scroll sideways →

Deposit & LMI for $700,000 property

← Scroll sideways →

Deposit & LMI for $800,000 property

← Scroll sideways →

Deposit & LMI for $900,000 property

← Scroll sideways →

Deposit & LMI for $1,000,000 property

← Scroll sideways →

Source: Quotes taken from Genworth LMI premium calculator, correct as at 13 May, 2022. Premiums listed are for first home buyers (owner-occupiers) borrowing with a loan term of up to 30 years and excluding stamp duty.

For example, if you’re a first time buyer looking at a house worth $500,000 and you only have a 5% deposit of $25,000, you can expect to pay about $14,872 LMI for a 30-year loan at the time of writing. With a 10% deposit of $50,000 that drops to about $8,680 and with a 15% deposit of $75,000 it’s about $4,713.

But remember, these figures are only a guide.

If you are a first home buyer and are considering applying for a home loan with a low deposit keep in mind that the total initial costs you outlay in securing a property, including your deposit and any LMI that’s payable, are only a small part of your overall long-term costs.

Borrowers with a larger deposit can often secure a lower home loan rate, and having a higher initial deposit is one factor that may help reduce your risk of mortgage stress. Purchasing a property with a small deposit and a high loan-to-value ratio can also result in negative equity.

Compare Home Loans

How to avoid paying Lenders Mortgage Insurance

Lenders Mortgage Insurance (LMI) varies from lender to lender, and there are ways you may be able to negotiate a better deal. Having a reasonable deposit, taking advantage of government grants and considering if your job could help you to reduce or waive the LMI that might be payable on your home loan are some suggestions you may like to consider.

1. Have enough deposit for a home loan

The easiest way to avoid paying any LMI is to have enough deposit saved so it’s less likely that a lender will require you to take out the insurance. The minimum deposit that is generally required to avoid paying LMI is 20% of the property’s value, but this can vary from lender to lender.

2. Take advantage of government schemes and grants

If this is the first home you are hoping to buy but you only have a 5% deposit, you may be eligible for the Australian Government’s First Home Guarantee Scheme (formerly FHLDS). This won’t give you any extra money, but for those borrowers who have as little as 5% of genuine savings as a deposit, the scheme will guarantee the remainder (up to 15%) needed to meet any lenders’ criteria for not requiring any LMI.

There are strict eligibility criteria, a limited number of places and a limited number of lenders taking part in the scheme.

As a first time buyer, you may also be eligible for a First Home Owner Grant. This scheme was introduced in July 2000 to help offset the impact of GST on buying your first home.

It’s a national scheme but run by each state and territory, and could give you money towards your deposit that might help offset or even cancel out any LMI costs.

3. Consider if your job could help reduce your home deposit costs

What job you do may entitle you to some waiver of LMI fees.

For example, ANZ is currently waiving LMI fees for eligible medical practitioners, specialists and dental practitioners who only have a 5% deposit. Eligible accountants, legal professionals, optometrists, physiotherapists, chiropractors and veterinarians may be eligible to have their LMI waived for deposits of 10%.

Waivers for certain occupations are not always listed online by lenders. Stephen Rasmussen, Director of the Finance Brokers Association of Australia, says it pays to ask lenders as you shop around.

Do you need a large or small deposit for a home loan?

The question of how much deposit you need comes down to whether you can save enough to avoid paying any LMI, or want to jump in the property market early with a deposit and pay the extra fees (if you have to).

Rasmussen says that’s down to each individual to answer but he says he has always believed that people should consider getting into the market as soon as they can afford it.

“It makes good sense – at least with your first home,” he says.

But having a big deposit could potentially help you to negotiate a better deal on interest rate.

The lower the deposit, the larger the loan and that means higher monthly repayments and you could end up paying out more in the long term.

For example, let’s use our Home Loan Calculator to show the amount you could end up paying if you were buying a $500,000 property with a deposit of 5% compared to 20%. This assumes you take out a principal and interest loan over 30 years at 3% and doesn’t take any other costs into account, nor any changes in interest rate or inflation over the time of the loan.

The impact of a large vs small deposit on a $500,000 home

← Scroll sideways →

Source: LMI figures are based on Genworth calculations, *except the 20% which assumes a lender does not require LMI. Monthly and final repayment figures are based on Canstar’s home loan calculator on 3% interest rate and over 30 years giving the amount of principal and interest repaid.

A 5% deposit of $25,000 means you need a loan of $475,000, for which you’d repay $2,003 a month. The total repayment of principal ($475,000) and interest ($245,943) over the 30 years is $720,943. You could be liable for LMI too of about $14,872, which you could pay upfront or add to your home loan – choosing the latter option would increase your repayments.

A 20% deposit of $100,000 means you’d need a loan of $400,000, for which you’d repay $1,686 a month. The total repayment of principal ($400,000) and interest ($207,110) over the 30 years would be $607,110.

That’s a difference of $113,833.

So saving that extra $75,000 for a 20% deposit could potentially save you about $316 a month in loan repayments.

Again though, there are other costs and fees that you need to take into account so this is only a general guide. You can use our calculator to work out the figures that best suit your situation.

Cover image source: Rido/Shutterstock.com