Gone are the days where you could access a home loan without having a home loan deposit, of some kind. If you want to ensure you get approved for your home loan, it’s time to get serious and start looking at how much you might need for a deposit.
Purpose of a Home Loan Deposit
The purpose of a deposit for your home loan is to help you determine how much you can borrow and what your potential monthly loan repayments will be.
While you might have been lulled into thinking you wouldn’t need a deposit, with the current mortgage market and lender’s reluctance to provide more than 95% finance, it’s fair to say that it’s pretty impossible to get access to a mortgage with 100% finance.
This is why you need to start thinking about how much deposit you’ll need before you start looking for a new home to buy.
Without fully understanding how much of a deposit you’ll need, it can make the home purchasing process pretty tricky and downright stressful.
How Much Deposit Do You Really Need To Save?
If you’re a first home buyer, you’ll need to carefully consider your options regarding a home loan deposit.
Do you have any savings in place already? How are you going to get your deposit together if you don’t? How much do you actually need to save? If you’ve already begun saving, you’re on the right track. You could start to look at buying a home when you’ve saved about 5% of the purchase price of a house.
So one of the important aspects to your savings plan is figuring out how much you need to have saved compared to how much you can afford to pay in monthly loan repayments — once you’ve got a mortgage in place.
Don’t forget about Lenders Mortgage Insurance (LMI) too. If you’re deposit is between 5% – 20% of the purchase price, you’ll have to pay LMI.
This allows lenders to provide you with a larger amount of the purchase price because they are covered by the LMI should things go awry and you’re unable to cover your mortgage repayments.
You can include the LMI amount in your upfront costs or you can incorporate them into your loan repayments — it’s your choice. Just make sure you take this amount into consideration when looking at home loan amounts.
Start Researching Property Prices In Your Area
Having an idea of the cost of housing in your area or the area you’re looking to buy in is a good place to start. Then once you’ve got some sale prices together, it’s a good idea to figure out how much of a minimum deposit you’d need to be able to secure your home loan.
Here are some examples to get the ball rolling:
|Home Purchase Price||Minimum Deposit Required|
|With LMI (5%)||Without LMI (20%)|
NB: These figures exclude any upfront costs you’ll have to pay.
These figures are intended for home buyers looking to access a standard home loan. If you’re self-employed or have bad credit, you’ll need to look at our other home loan options.
Once you’ve got an idea of what you can afford to borrow and how much you can save, it makes the home loan process a lot simpler.
What Your Deposit Amount Means for Your Home Loan
If you are able to have a deposit that is over 20%, you will avoid paying any LMI, but not everyone is able to achieve a 20% or more deposit. As you can see from the figures above, even the minimum deposit can be take a while to achieve.
Basically, the more of a deposit you have, the better off you are in terms of how much interest you’ll pay on the principal loan amount and how much your LMI amount will be.
While aiming for the minimum deposit will get you into a home faster, it pays to consider your options in terms of what having a larger deposit will mean for your home loan.
For example, lenders tend to favour home buyers who are able to provide at least a 10% deposit, because it shows strong savings and a commitment to achieving a goal.
You’ll also pay less interest with a larger deposit and you could access better interest rates because of this. You could also pay less in Lenders Mortgage Insurance too.
Use our home loan calculators to get a better understanding of how much you can really afford and let the answers you receive from the calculators drive how much of a deposit you’ll need to save.
5 Ways to Save Your Home Loan Deposit
Now that you understand how important your home loan deposit is, it’s time to figure out how you’re going to save for your deposit.
While you’re likely well on your way to saving for a deposit, if you’re not, some of the strategies below should meet your needs.
#1: Create a budget that allows you to save at least 10% of your monthly take-home pay. If you can stretch it, try saving 15-20% to achieve your home loan deposit faster.
The easiest way to do this is to have your employer split your pay into two accounts, so that you don’t even see the full amount of your take-home pay.
#2: Start a side hustle on top of your normal job. Take the money you earn from this side hustle and deposit it straight into your savings account.
Some ideas could include:
- Freelance copywriting
- Designing ebook covers
- Selling your unwanted stuff on eBay
- Creating printables for selling on Etsy
Take the skills you have a monetise them!
#3: Make sure your savings account is a high interest bearing account, so that you’re maximising the savings you have. Chat to your bank about your options and ensure that this type of account can’t be accessed easily, so you’re not tempted to dip into the funds and go on a shopping spree.
#4: Chat to your parents and see if they are able to assist you in any way. Maybe they can provide you with some funds or perhaps they could use the equity they have in their home to help you buy your first home.
Approach them with attractive terms so that it’s a win:win for both parties, such as offering them 10% of the sale price when you sell, or ‘shares’ in the home if it’s an investment property.
Think outside the square and make it an attractive option for them too.
#5: Cancel subscriptions to paid TV, start exercising outside rather than at the gym and look to make your lunch everyday. If you’re buying your coffee everyday, restrict these to weekend-only purchases. You can start these things back up again once you have your new home.
#6: Think short-term pain, long-term gain!
Now that you understand the importance of a home loan deposit, you should have a clear picture of what that means in terms of your savings plan, home loan amount and monthly loan repayments as well as how this all fits into your budget.
Chat to the team at Australian Credit and Finance about how we can help you find the right home loan for you, so you can get into your dream home sooner.