When you're overseas, it's every expat's goal to come back to Australia in a comfortable position, and part of this comfort is having a a house to move back into and not joining the ultra-competitive rental market. The question that most expats then have is: How much do I need to save to ensure I can afford the house I want? This article helps to break down the different considerations of saving for your minimum deposit for a home loan in Australia.

What is a deposit, and why do I need it to apply for a home loan?

A home loan deposit is the amount of money you contribute towards the purchase price of a property. Lenders require a deposit to secure a home loan. It acts as security for the lender and demonstrates that you have financial stability and the ability to make repayments. The deposit can also determine the type of loan and interest rate that may be applicable to you.

How much do you need for a home loan deposit in Australia?

The typical deposit amount lenders require is between 5% to 20% of the property's purchase price. The amount required will vary depending on the lender and your individual circumstances. The Loan to Value Ratio (LVR) is also a significant factor in determining the required deposit.

The LVR is the amount of the loan compared to the property value, expressed as a percentage. For example, if you have a deposit of 20% of the property value, the LVR will be 80%. Generally, the lower the LVR, the better your chances of approval and the more favourable your interest rate.

In Australia, if you borrow above 80%, the lenders will charge Lenders Mortgage Insurance (LMI). This insurance protects the bank in the event that you default on your loan and the value of your property after the sale is lower than the outstanding loan balance. Even though it is insurance to protect the bank, the borrower needs to pay the premium to provide the bank with the incentive to lend above 80%.

For expats, the deposit goalposts differ greatly between banks. The general rule is that most lenders need a minimum 20% deposit. However, for quite a few, you'll need a deposit as high as 30% or even 40%, plus have funds for your stamp duty. Some lenders will consider less than a 20% deposit with LMI; however, these are few and far between, as mortgage insurance providers generally do not like to insure overseas borrowers.

How much do I need to save for a deposit and other upfront costs?

To calculate how much you need to save for a deposit, determine the percentage your lender requires based on your specific circumstances. Then, multiply this by the purchase price of the property. In addition to the deposit, you must prepare for upfront costs such as stamp duty, legal fees, and other related expenses. It's best to do some research and get an estimate of these costs before starting to save.

You can normally find stamp duty and other cost calculators online or talk to your mortgage broker and ask them to run some numbers for you.

For example, if you were purchasing for $500k and wanted to save for your 20% plus costs, and stamp duty was $20k, then you would need at least $120k to proceed with the potential purchase.

What if I have a smaller deposit?

Entering the property market, especially for first-time home buyers, often hinges on how much deposit you must pay. A common misconception is that a large deposit is essential for a home loan application. However, there are lenders that will consider a minimum deposit of just 5%. Before initiating the application, checking your credit report to understand your borrowing power is prudent. Assessing your financial situation also gives you insight into your capacity to repay your home loan regularly. It's advisable to seek independent legal and financial advice to ensure the loan aligns with your personal objectives and financial circumstances.

Once you've gone through these preliminary steps, you can apply for pre-approval to get a clearer picture of your loan amount, interest rate, and the lender's criteria. Then, you can commence your property search. Be prepared for other upfront costs like stamp duty, legal, and registration fees, which your home loan won't typically cover. Conducting a title search and reviewing the contract with a conveyancing lawyer is essential to home-buying, helping you avoid future legal complications.

Opting for a smaller deposit comes with its own set of advantages. First and foremost, you can achieve home ownership sooner rather than later. You won't need to save as much money upfront, easing the immediate financial burden. Government support is often available to first-home buyers with smaller deposits, potentially saving thousands of dollars. On the flip side, a smaller deposit also has its risks and additional costs. One of the most significant is the requirement to pay Lenders Mortgage Insurance (LMI), an additional cost designed to protect the lender. You'll also be subject to a higher loan-to-value ratio, which could result in higher interest payments over the life of the loan.

Your lender may also require additional security if you don't have what they consider genuine savings or a larger deposit. In fluctuating economic conditions, a smaller deposit could mean that your home loan repayments are more susceptible to changes in the interest rate. Therefore, before deciding, understand the pros and cons of how much deposit you opt for, considering all other factors contributing to your financial situation.

Careful planning and understanding the lending criteria can significantly affect your home loan application, especially when opting for a smaller deposit. Remember, the bigger your deposit, the less interest you will pay over the loan's term. Therefore, consider your options carefully and consult professionals for advice tailored to your needs.

What is the First Home Guarantee?

For first-home buyers, navigating the financial landscape can be challenging, especially when securing a home loan. One solution is the First Home Guarantee scheme, designed to support your entry into the property market. This government support programme allows you to purchase property with a smaller deposit, as low as 5% in many cases, without the need to pay Lenders Mortgage Insurance (LMI). That's a saving that can amount to thousands of dollars.

Eligibility criteria for the First Home Guarantee is stringent. You'll need to provide evidence of genuine savings, demonstrate regular repayments of living expenses, and maintain a clean credit report. Lenders will assess your borrowing power based on these factors and their lending criteria. Remember that this scheme is primarily geared towards low-income individuals and families, so your financial situation will be a big determinant.

As for the types of property you can purchase, they can vary. Typically, the scheme is tailored for residential properties but can include newly built homes, townhouses, and even some apartments. Conducting a title search will be crucial in determining the property's suitability in line with the scheme's requirements.

If the First Home Guarantee isn't quite right for you, alternative schemes are designed to aid home buyers. These alternatives may have different minimum deposit requirements and may not offer the same relief from LMI, but they might provide other cost-saving measures. Whether going through a traditional lender or benefiting from a government scheme, you'll face various upfront costs like stamp duty, registration, and legal fees.

Before deciding, seek independent legal and financial advice tailored to your personal objectives and financial circumstances. This advice should consider your capacity for regular repayments and additional costs like the interest rate applicable to your loan amount. Remember, the bigger your deposit, the less interest you're likely to pay over the lifetime of your loan.

Thus, for those looking to transition from paying rent to home ownership sooner rather than later, the First Home Guarantee and similar schemes offer a practical solution, especially when you don't have as much money saved up for a larger deposit. These programmes can significantly impact your home loan application, potentially saving you thousands and expediting your journey to owning a home.

What if I don’t have a deposit at all?

For first-home buyers who may not have a big deposit saved up, a viable option is getting a loan with the help of a guarantor, usually a family member. This route can enable you to sidestep challenges like the need to pay Lenders Mortgage Insurance (LMI) or save a larger deposit. It can save you thousands of dollars in additional costs and accelerate your journey to home ownership. Before starting this path, you must meet the lender's lending criteria. This involves checking your credit report and understanding your borrowing power, which takes into account your income, financial situation, and ability to make regular repayments.

As for the application process, your guarantor typically offers additional security against your home loan, usually in the form of their own property. Many lenders will allow you to apply for a loan with as little as a 5% deposit if you have a guarantor. This means you won't need to save as much money upfront. Furthermore, the loan-to-value ratio will be more favourable, allowing you to pay less interest over the life of the loan, provided you make regular repayments.

Now, let's consider the risks to your guarantor. They are essentially putting their own property on the line. If you default on your loan repayments, your guarantor will be liable for the loan amount you owe. This could seriously affect their financial circumstances, not to mention your relationship with them. Additionally, other factors, like changes in property value or interest rates, could affect the loan's affordability and put your guarantor at further risk. Therefore, it's essential for both you and your guarantor to seek independent legal and financial advice tailored to your individual needs and circumstances.

Before you apply, discuss the purchase price of the property you are interested in, the amount of loan you need, and any other upfront costs like stamp duty, registration fees, and legal fees. Calculate your deposit amount and discuss the implications with your guarantor. Understanding all the ins and outs of how much deposit you need and how having a guarantor can affect your home loan application and can offer opportunities and risks.

Remember, your guarantor should clearly understand their responsibilities and the potential risks involved. As with any financial commitment, due diligence is crucial for the home buyer and the guarantor to ensure that the arrangement aligns with your personal objectives and doesn't jeopardise either party's financial stability.

Is the source of deposit relevant to lenders?

When applying for a home loan, the source of the deposit can be relevant to lenders. Some lenders prefer deposits that are saved over a period of time rather than gifts or inheritance, which may indicate that the borrower is not financially stable. Lenders may also require proof of the deposit's source, especially for larger amounts.

The lenders normally get particular about this for loans that involve Lenders Mortgage Insurance (LMI), as the criteria on these loans are generally more stringent than for loans with a 20%+ deposit.

What are the advantages of making a bigger deposit?

Making a bigger deposit can have several advantages, including a lower loan-to-value ratio, a lower interest rate, and avoiding the need to pay Lenders Mortgage Insurance (LMI). Generally, a deposit of at least 20% of the property price can help you avoid LMI and save you thousands of dollars over the life of your loan.

There are many different considerations when it comes to saving for the deposit and also deciding which lender to go with and how much deposit to put down. Some banks will offer much more generous terms and less interest charges the bigger your deposit, and sometimes the lender options are limited based on the income assessment and borrowing power the bank will provide based on your overseas income.

How can I save for a home loan deposit?

To save for a home loan deposit, you can take several steps, including having a specific goal with a corresponding plan, tracking your spending, having another source of income, managing debt, and having a separate account for deposit savings.

• Have a specific goal with a corresponding plan.

To save for a home loan deposit, you can take several steps, including having a specific goal with a corresponding plan, tracking your spending, having another source of income, managing debt, and having a separate account for deposit savings.

Rates current as of 25th August 2023

• Track your spending.

Tracking your spending is probably the most crucial step in saving for your deposit. It is important to understand your expenses and map them out using Excel or a budgeting tool. You can then work out your unnecessary expenses and put these additional amounts into a savings plan.

• Have another source of income.

Having another source of income can help you save for a house deposit. Working odd jobs, Uber, freelancing, etc., is also a great way to help increase the income you are bringing in. You could also look at selling any items you no longer want or need to help bring in additional cash.

• Manage debt.

Debts such as personal loans and credit cards can be viewed negatively by lenders and are generally considered bad debts by financial advisors. They are used for personal spending and not for investment. It's important to try to clear this debt as quickly as possible to help improve your financial situation and make your application more appealing to a lender. By effectively managing debt, borrowers can free up more funds to save for home deposit.

• Have a separate account for deposit savings.

Separating your savings account from your everyday spending account is crucial to helping you save and budget for your deposit. By moving these funds into a separate account, you'll be easily able to track if you are meeting your savings goal, and it will also ensure you are more likely to stick to your proposed budget.

Conclusion

It seems logical to save as much money as possible before looking for a house. But timing is everything, and if you wait and save for too long, you can often miss the boat as prices increase.

Saving for a home loan deposit requires planning, dedication, and discipline. By following the tips in this article, you can start saving for a deposit and move closer to your goal of owning a home. Remember to shop around and compare different lenders and loan products to find the one that best suits your needs and budget. Good luck with your savings journey!

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