There are certain costs when you buy a home. You will have to save a 5% deposit, and it has to be genuine savings. For a lender to consider the savings as genuine, you must have had them for at least three months. This may vary between lenders.
You will also need to factor in conveyancing fees, which depend on the complexity of the transaction. You will also need a lawyer to review the contract and transfer the title. They will also assist with any other aspects associated with the property purchase. On top of that, there is a fee to establish the mortgage. This varies between states.
Then, of course, you need the deposit for the home. Most people will require a deposit of at least 20%, but there are exceptions to this depending on your circumstances. Some lenders also offer no deposit home loans, but involves certain criteria.
Minimum Deposit for a Home Loan
Before moving into anything else, you need to first understand how much the house deposit amount should be. General deposit requirements in Australia are 20% of the purchase price based on a 25 or 30-year term. A deposit is required to protect the lender, which means that you won’t need to borrow as much money. That reduces the amount of interest you will pay over the life of your loan.
In some situations, you can pay off the loan much faster. For example, if you were buying a home for $600,000, you would need a deposit of $120,000, which is 20% of the value. On top of that, you will need to have the money available for the associated costs previously mentioned.
Consider using a budget planner to estimate and note all possible costs for home loan financing!
Have you considered getting pre-approved for a home loan?
Getting a home loan pre-approval is the logical next step in the home-buying journey. You might wonder why it is even necessary, since home loan pre-approval doesn’t guarantee a full approval and without a full approval, you will not be provided with any loan settlement. However, what you are missing here is the probability. With a pre-approval, not only are you able to pinpoint everything lacking in your home loan application, but it also indicates that you are likely to receive a full approval.
With a pre-approval, one is also able to easily browse properties in the market. You will have an idea of your borrowing capacity and budget under which property hunts become much more reliable, abundant and narrowed. This creates an opening for you in the home loan market, which is much greater than idle confusion and speculation.
Why do lenders want borrowers to have a 20% deposit?
Lenders like borrowers to have a deposit because it reduces the risk to them. Those who have equity in their property are less likely to default or be in a situation where they need to stop making mortgage repayments. If you do, however, default on your home loan and the lender needs to resell the property, the potential losses are minimised, and you may end up with some funds left over, putting you in a better financial position.
Ultimately, saving for a deposit requires a lot of discipline and self-control, which makes you a more appealing prospect to lenders. Having a higher deposit may also reduce the interest rate on your home loan.
Lenders Mortgage Insurance (LMI)
While 20% is the most desired minimum deposit, some lenders will offer home loans with a 5 or 10% deposit. If your deposit is lower than 20%, you will be subject to Lenders Mortgage Insurance (LMI). This protects the lender in the event that you cannot make repayments. LMI is a one-off cost at the time of buying a property. Its costs vary depending on the size of your deposit and the value of your property.
Guarantor for Home Loan
One option to avoid LMI is to have someone act as a guarantor for the loan. This basically means that someone agrees that if you cannot make the repayments, they will make them for you. Typically, it would be a home buyer’s parents acting as a guarantor on their home loan. However, if that isn’t an option, you do have other choices. If you are struggling to save a 20% deposit, you do have options available to help you secure your first home.
One of the first options is to apply for a five percent home loan. As previously mentioned, if you do take out a five percent home loan under the government’s First Home Guarantee scheme, you won’t have to pay LMI.
What are the Pros and Cons of a low deposit?
Although it is in your best interests to have the highest deposit possible, it isn’t always an option, and there are pros and cons to a low deposit home loan.
Pros of Low Deposit
The first pro is that you get on the property ladder faster and don’t have to wait to save a high deposit. Getting on the property ladder faster means that if prices increase, you will benefit from them and won’t have to worry about shifting goal posts. Instead, you can enjoy the benefits of property prices increasing, knowing that you are building equity in your home.
That is another advantage. If the area you want to buy in is going through exponential growth, then you will have a much more favourable LVR, which could help you purchase an investment property quicker.
Cons of Low Deposit
There are, of course, drawbacks to taking out a low-deposit home loan. If you find yourself in the position where you need to refinance, then you will have low equity, which will make it more difficult. You may not even be able to finance without minimum equity. If a lender is willing to let you refinance with low equity, then you will probably be subject to LMI. This has to be paid in a lump sum, and you would actually be better off putting that money into your mortgage. This will minimise your interest costs.
In addition to being required to pay LMI, you could end up in negative equity, which is where the mortgage value is higher than the cost of your home. That means that if your home was sold because you couldn’t meet the repayments, you would end up with a debt, and your financial position would be worse than before buying a home.
To help first home buyers get onto the property ladder, the government introduced the First Home Guarantee in the 2022 Federal Budget. The First Home Guarantee scheme is designed to help first home buyers who only have a five percent deposit. Under the First Home Guarantee, you only need a five percent deposit, and the government will guarantee the other 15 percent. You will not be liable for LMI under this scheme.
There are only 35,000 places available each year, and you must meet the scheme’s criteria.
Want to know whether you should rent or buy? Use our rent vs buy calculator to compare your finances when you rent vs when you choose to buy!
What are the criteria for the First Home Guarantee Scheme?
In addition to being able to meet the loan repayments, you must:
- Be a first home buyer. That includes your partner if you are buying with a partner.
- Be an Australian citizen and at least 18 years old.
- Have a taxable income of no higher than $125,000 for singles and up to $200,000 for couples.
- Be an owner-occupier. You cannot apply for the scheme for an investment property.
Wish to find out how much you can borrow for your home loan? Use our borrowing power calculator for an accurate estimation!
Property that can be purchased under the scheme
Any type of property can be purchased under the scheme, including:
- Newly built house, apartment or townhouse
- Off-the-plan apartment or townhouse
- House and land package.
- Land with a build contract.
There are price caps for each state. Please check the government’s postcode search tool to find out the maximum you can borrow under the scheme.
First Home Owner Grant (FHOG)
The First Home Owner Grant (FHOG) is the government’s one-off grant that was established to assist first home buyers when building or buying a new home. FHOG is a national scheme, but its rules and regulations differ according to the state and territory.
For example, the First Home Buyer Grant in QLD is worth $30,000 with conditions applying. To be eligible for the said grant, one’s land has to be valued under $750,000. This very price cap is different amongst various territories; therefore, buyers are advised to discuss specifications thoroughly with their mortgage broker.
Family Home Guarantee Scheme
The Family Home Guarantee Scheme is another government grant that allows single parents or guardians to purchase a home with as little as 2% deposit without paying Lenders Mortgage Insurance (LMI). With the scheme, single parents can be guaranteed up to 18% of the home loan.
This scheme is based on the first home guarantee scheme designed for first home buyers and was announced in the 2021/22 federal budget. However, unlike the first home guarantee’s minimum 5% deposit, single parents will be able to get a mortgage with a 2% deposit, which is 3 times lower than that of the latter.
Help to Buy Scheme
The Australian government help to Buy scheme is a shared equity scheme that aims to support 40,000 Australian households over four years in purchasing a new or existing home, with financial assistance provided through a government equity contribution.
Under the scheme, eligible buyers can enter the property market with a deposit as low as 2%. The government then contributes a portion of the property’s value, up to 30% for an existing home and up to 40% for a new home, reducing the amount the buyer needs to borrow.
When both the deposit requirements and the size of the home loan are reduced, home ownership becomes more accessible, and home buyers can enter the property market sooner than they might have originally been able to.
Stamp Duty Exemptions and Concessions
Stamp duty, as we know, is a state or territory government tax applied to the sale or transfer of property and certain other assets. It is also known as transfer duty. Typically calculated as a percentage of the property’s value, stamp duty generally ranges between 3-5%, though the exact rate varies depending on the state or territory. Try using our stamp duty calculator for an accurate estimation!
Speaking of exemptions and concessions, those are available in certain circumstances. For example, first home buyers may be eligible for reduced or waived stamp duty if the property value or vacant land falls below a specified threshold, one set by their state or territory.
Exemptions can also apply when properties are being transferred between spouses or partners. Along with them, seniors, pensioners and farmers can also qualify for concessions in some regions. Ultimately, thresholds and eligibility can differ by location and change over time, so it’s important to stay updated with the relevant state or territory authorities.
Try using our home loan calculators to estimate your overall home loan budget!
For further information, please feel free to contact one of our friendly mortgage brokers. Alternatively, you can book an appointment online.
