There's a lot of information around for home buyers, but if you’re thinking about buying your first home, the burning question is probably around how much you need as a deposit. Of course, the more money you have to put down on your new home, the better, but knowing a ballpark figure to aim for can help you on your saving journey, and make your homeowner dream more attainable, sooner.
To help you get started, we’ve answered some of the most common questions first-time home buyers have when it comes to saving for a home deposit.
The general rule of thumb is that you will require between 5% and 20% of the property purchase price as a deposit to be eligible for a home loan.
At P&N Bank, first home buyers can borrow up to 95% of the purchase price of their new property, but if you want to borrow 95%, the short story is - your deposit will need to factor in any Lender’s Mortgage Insurance (LMI) premiums and upfront fees within the 95% value of the property.
If the property you are purchasing is $450,000:
LMI can affect your deposit, so it's important to know about it. First of all, let’s explain Lender’s Mortgage Insurance.
Any mortgage comes with a risk for the bank. The more you borrow, the greater that risk. LMI is insurance for the bank, because they're lending a proportion of value of the property that may not be able to be recovered in full if something goes wrong. However, as the borrower, you're responsible for covering the premium.
This means that the first, and biggest, thing that may affect your deposit is LMI. If your deposit is less than 20%, you must take out LMI (or have a guarantor for your loan) to protect the bank against the lending risk. Your LMI premium will be added to the total of your loan, however, your total loan cannot exceed 95% of the purchase price of the property.
Depending on your property price, plus the cost of your LMI, you may need enough to cover all or part of the costs of LMI upfront, as part of – or on top of – your deposit amount. If you've got a bigger pot saved, such as 20% of the price or more, you will avoid the need for LMI.
How much you need for a home loan deposit will depend on your income, budget, savings ability and whether you have a guarantor. Use our Home Loan Borrowing Power calculator to help work out how much you may be eligible to borrow.
You may be able to reduce the deposit amount if you’re eligible for the Australian Government’s Home Guarantee Scheme (HGS), or your parents are willing to be guarantors on your home loan (there’s more on this later). Don’t forget to save additional funds to cover settlement costs and your Lenders Mortgage Insurance (LMI) if you are borrowing more than 90% of your purchase price and are not eligible for one of the guarantee schemes.
The Home Guarantee Scheme (HGS) is a government initiative aimed at helping eligible first home buyers get into a home of their own, sooner. The three different schemes provide a guarantee to the lender, and that guarantee allows eligible first home buyers to purchase a home with a deposit of as little as 5%, without needing to pay LMI.
A guarantor is someone who offers equity in their own home as security for a home loan. This means that if they have enough equity, your parents can use their home, as security. By doing this, you won’t need a deposit or be required to take out LMI.
There are a few things your guarantor will need to consider before committing to help you, so make sure they read our article on becoming a guarantor first.
At least part of your deposit will need to come from genuine savings to show that you are able to save. This gives the bank greater confidence in your ability to pay back the loan.
You can use money that is gifted to you, a bonus from work or inheritance money, however you may need to show proof of where this money has come from, as well as evidence of your saving habits over a three-month period.
If you have a larger deposit saved, it can help in two ways. It can either reduce the amount of LMI you will have to pay (or not have to pay it at all) and, in some instances, it can also mean you’ll be eligible for a cheaper home loan interest rate – many home loan rates differ depending on the Loan to Value Ratio (LVR).
LVR stands for Loan to Value Ratio. It relates to the amount of the loan against the value of the property you are buying. For example, if the property you intend to purchase is valued at $600,000 and the loan you apply for is $480,000, your LVR is 80%.
It's good to know your LVR when exploring your home loan options as discounted interest rates can sometimes be offered on a lower LVR.
Some home loans may attract upfront fees, such as establishment fees, stamp duty, valuation fees, document fees or other government fees, and this will depend on your financial institution or broker, and the type of loan you’re taking out. These can all vary based on the type of property you're buying, and even the location.
It’s important to know what costs to expect, as you may need to cover them upfront on top of your home loan deposit – this is the case with covering LMI and the settlement costs.
First-time home buyers in Western Australia may be eligible to receive a grant towards the purchase of a new home, from the state government, through the First Home Owners Grant (FHOG). The FHOG assists first home buyers to buy or build a new, or substantially renovated, residential property with a grant of up to $10,000.
Visit the state government’s website to learn more about eligibility requirements.
It's hard getting started as a first-time home buyer, particularly when you just want to know how much you need to save for your house. Unfortunately, the answer isn't one size fits all, and the simplest solution is to talk to an expert about what to expect.
If you have more questions, don’t worry, we're here to help! Take the next step towards buying your first home, or just get more information on your options, by making an appointment with one of our Home Loan Specialists. The team are available virtually, in-branch or our mobile team can meet you at home or work, at a time that suits you.
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