The deposit you save has much more impact than just timing your entry into the property market. Waiting to save a deposit of 20% or more achieves two possible wins:
- The bank may give you a better interest rate because you represent a lower investment risk for them.
- You can avoid paying Lender’s Mortgage Insurance (LMI) because your loan-to-value ratio (LVR) is 80% or less.
So should you save up 20% of the purchase price before applying for a home loan, or should you dive in with the bare minimum 5% deposit, even if it means you pay thousands of dollars for Lender’s Mortgage Insurance (LMI)?
First home buyers looking at current property prices in Australia’s most popular cities can be left feeling they may never get in if they wait longer. It’s certainly frustrating to see your deposit savings “shrinking” as prices rise. Some property experts advise for this reason that you should stop renting and start paying interest with the absolute minimum deposit, even if you have to pay LMI to do so.
Buying a house is one of the biggest decisions you’ll ever make. If you need some help raising the funds for a bigger deposit – and you are buying a newly-built home that no one has lived in before – the government’s First Home Buyers Grant is available in each state and territory.
How big a deposit do I need to get a lower interest rate?
The deposit you can raise will impact the interest rate offered to you by the bank. The bigger your deposit, the more you can negotiate your own interest rate and choose the lender you really want – while other lenders do not negotiate at all.
So what interest rate will you find on offer at different LVR levels? Our Canstar database shows the following rates available at time of writing:
| Interest Rates for Variable Rate Home Loans | |||
|---|---|---|---|
| At 80% LVR | At 90% LVR | At 95% LVR | |
| Minimum | 3.59% | 3.70% | 3.70% |
| Maximum | 5.84% | 5.84% | 5.84% |
| Average | 4.59% | 4.68% | 4.73% |
| Interest Rates for 3 Year Fixed Rate Home Loans | |||
| At 80% LVR | At 90% LVR | At 95% LVR | |
| Minimum | 3.67% | 3.74% | 3.74% |
| Maximum | 5.24% | 5.05% | 5.05% |
| Average | 4.22% | 4.25% | 4.26% |
| Source: www.canstar.com.au. Based on loan amount of $300,000. Rates are current as at 15 June 2016. | |||
How big a deposit do I need to avoid Lender’s Mortgage Insurance?
Lender’s Mortgage Insurance (LMI) is charged when your LVR (loan-to-value ratio) is more than 80%, meaning you have a deposit of less than 20%. Borrowers can usually get a loan with only a 5% to 10% deposit by paying LMI, but their LMI premiums will be quite expensive.
You can typically add the cost of LMI premiums to your loan balance, but they’re no small thing. It can cost thousands of dollars depending on the size of your loan. The smaller the deposit and the higher the loan, the more the LMI premiums will cost.
If you have a deposit of 20% or more saved, you can avoid the extra costs of LMI because you represent a lower risk of defaulting on your loan repayments to the bank. Some first home buyers may also be eligible for the federal government’s First Home Loan Deposit Scheme, which is due to launch in January 2020, and is designed to allow successful applicants get a home loan with a deposit as low as 5% without needing to pay for LMI.
If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350K in NSW with an LVR of 80% of the property value and that offer an offset account. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.
Other ways to avoid LMI
There are other ways to avoid paying LMI, such as having a family member as a security guarantor for your loan, or loans where LMI is excluded for professional occupations.
It’s a well-kept secret that if you are in a respected profession where job security and incomes are both high, you can ask your bank for a special home loan where you don’t pay LMI and you may even be eligible for a discount on your interest rate.
Depending on the industry you work in, you may be eligible for the bank to waive LMI on a loan with an LVR of 85% to 90%, meaning you only need a 15% or 10% deposit. In these cases, the bank doesn’t ask you to pay for the risk to them with LMI because they view your repayment risk level as lower than borrowers in other occupations.
Occupations that are viewed as low risk by financial institutions may include:
- Accountants, Auditors, and Actuaries
- Dentists
- Engineers
- Financial planners
- Geologists, Geophysicists
- IT Managers
- Lawyers
- Medical practitioners (Doctors, Surgeons, and Specialists)
- Optometrists
- Pharmacists
- Surveyors
- Veterinarians
It’s worth asking your bank whether they offer an LMI-free home loan, since not paying LMI could save you $5,000 to $10,000 on the average mortgage. But lenders probably won’t tell you if these deals are available up front, so you’ll need to either ask if they are available or perhaps go through a mortgage broker.
What else do I need to pay, apart from the deposit?
It’s all well and good if you’ve saved a deposit, but you also need to save up for the extra costs associated with buying a home. Things that can take quite a chunk out of your savings include:
 |
Stamp duty (use our Stamp Duty Calculator to work out your cost, varies by state) |
| Conveyancing and legal costs (can be around $1,500 – $3,000) | |
| Title search (can be around $285) and registration fees (can be around $75) | |
 |
Pest and building inspections (can be around $500) |
| Upfront loan fees (establishment fee or application fee) (ranges from $0 to more than $800) | |
| Council and water rates for end of quarter, if required (can be around $500 – $700) |
How much do I need to save before buying my first home?
These prices are solely designed as an example and may not reflect exact costs involved in financing your first home.
| Home purchase price | With 5% Deposit | With 20% Deposit |
|---|---|---|
| $300,000 | ||
| With 5% Deposit | 5% Deposit | $15,000 |
| LMI Estimate | $7,610 | |
| Other Costs (Legals, Stamp Duty, Inspections) |
$15,000 | |
| Total Needed for 5% Deposit | $30,000 | |
| With 20% Deposit | 20% Deposit | $60,000 |
| Other Costs (Legals, Stamp Duty, Inspections) |
$15,000 | |
| Total Needed for 20% Deposit | $75,000 | |
| $400,000 | ||
| With 5% Deposit | 5% Deposit | $20,000 |
| LMI Estimate | $12,768 | |
| Other Costs (Legals, Stamp Duty, Inspections) |
$20,000 | |
| Total Needed for 5% Deposit | $40,000 | |
| With 20% Deposit | 20% Deposit | $80,000 |
| Other Costs (Legals, Stamp Duty, Inspections) |
$20,000 | |
| Total Needed for 20% Deposit | $100,000 | |
| $500,000 | ||
| With 5% Deposit | 5% Deposit | $25,000 |
| LMI Estimate | $15,960 | |
| Other Costs (Legals, Stamp Duty, Inspections) |
$25,000 | |
| Total Needed for 5% Deposit | $50,000 | |
| With 20% Deposit | 20% Deposit | $100,000 |
| Other Costs (Legals, Stamp Duty, Inspections) |
$25,000 | |
| Total Needed for 20% Deposit | $125,000 | |
| $600,000 | ||
| With 5% Deposit | 5% Deposit | $30,000 |
| LMI Estimate | $25,707 | |
| Other Costs (Legals, Stamp Duty, Inspections) |
$30,000 | |
| Total Needed for 5% Deposit | $60,000 | |
| With 20% Deposit | 20% Deposit | $120,000 |
| Other Costs (Legals, Stamp Duty, Inspections) |
$30,000 | |
| Total Needed for 20% Deposit | $150,000 | |
| Source: Canstar, Genworth LMI Premium Estimator Calculator. Please note that these calculations are a general estimate only. | ||
Whether you’re well on your way to a 20% deposit or just scraping together a 5% deposit, we can help you find a loan with both the price and features to suit your needs as a first home buyer. You can compare home loans with this year’s First Home Buyers Award and compare First Home Buyer home loans on our website.
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