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 need a deposit.
A deposit is a percentage of the purchase price 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 have already 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?
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’re a single income parent or have a partner who has an income, or if you have children, 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 2020 were about $1,700.
According to the Canstar Home Loan Borrowing Calculator, a single person earning that amount would potentially be able to borrow up to $514,000 for a loan at 3.75% over 25 years. The same person in a relationship with a partner who doesn’t work and have two children would potentially be able to borrow up to $357,000. If the partner earns $900, about half the average weekly earnings, this goes up to $471,000.
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.
Compare Home Loans with Canstar
The comparison table below displays some of the variable rate home loan products available on Canstar’s database for first home buyers with links to lenders’ websites. The products displayed are based on loan amounts of $350,000, $400,000 and $500,000 at 95% LVR in NSW, available for principal and interest repayments. The results are sorted by comparison rate (lowest to highest), then by provider name (alphabetically). 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 loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.
How much deposit do you need?
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.
There are 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 be paid upfront, from your savings.
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 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 the LMI that’s payable 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.