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  • Writer's pictureBret Mullavey

How Much of a Deposit Do You Need to Buy a Home?

Buying a home is a monumental step, and one of the most significant financial investments you're likely to make in your lifetime. Knowing where to start, and just how much of a deposit you need can be half the battle.


In this blog, we will break down what's the minimum deposit requirements, the more ideal deposit requirement, and what tools, schemes and tricks you can use to try minimise the deposit amount as much as possible.


We won't get into cross securing properties, and utalising equity in other properties - this is designed more for getting into your first place and understanding how much you need.


Lenders Mortgage Insurance

Before we understand the minimum deposit required, we need to know a little bit about Lenders Mortgage Insurance, what it is, and how we can reduce it or eliminate it all together.

It's really important to know this part, as generally all the schemes and assistance available are geared towards helping you get to a particular loan ratio to avoid Lenders Mortgage Insurance.


What is Lenders Mortgage Insurance?

LMI is a type of insurance that protects the lender in case the borrower defaults on their home loan. It doesn't protect you, the borrower, but enables lenders to provide loans above an 80% Loan Ratio.

The actual cost to you is the premium for the insurance, and it can be a really significant cost. The lower deposit you have (meaning the higher loan ratio), the higher the premium can be.


How do I work out my Loan Ratio?

Your Loan Ratio will be the Loan Value, divided by the Property Value.


For example, if you have a $1,000,000 property with an $800,000 loan, your LVR is 80%. Conversely, a $500,000 property with a $250,000 loan has a 50% LVR. A higher LVR indicates a higher risk for the lender, resulting in a higher interest rate.

Loan Amount

Property Value

Loan Ratio (LVR)

$800,000.00

$1,000,000.00

80.00%

$500,000.00

$750,000.00

66.67%

$350,000.00

$900,000.00

38.88%

When is it applicable?

LMI is applicable when the deposit is less than 20% of the property's value. This is commonly referred to as a high loan-to-value ratio (LVR) loan, where the LVR is above 80%.


Who does LMI protect?

LMI protects the lender, not you, the borrower. If you default on the home loan, LMI covers the lender for any shortfall after the property is sold and the sale proceeds are used to repay the loan.



House in Collingwood


So how much deposit do I need?

In really simple terms, at a minimum when you are purchasing a property, you'll need the following:

  • 5% of the purchase price

  • 'Costs' associated with buying the property, including:

    • Stamp Duty

    • Transfer Costs

    • Conveyancer Costs

    • Bank Fees / Settlement Costs

  • The cost of the LMI Premium


In an ideal world, you'd want to aim for 20% of the purchase price, plus costs to avoid LMI, however we know that's not always possible.


So as there are a few moving parts on any given transaction, let's look at a scenario (number may not be exact, but just used for example purposes:


Scenario 1:

Purchasing First Home - $500,000.000, in Victoria


In this scenario, we are going to assume you're eligible for a stamp duty exemption (we will get to that later):

Purchase Price (5%)

$25,000.00

Stamp Duty

$0.00

Transfer Fee

$1,259.50

Conveyancer

$1,500.00

Adjustments

$1,000.00

Bank Fees

$500.00

Lenders Mortgage Insurance

$13,965.00

Total

$43,222.40

So while you have to come up with 5%, you also need to come up with the additional costs, for a total amount of $43,222.40.


So now let's throw Stamp Duty in the mix:


Scenario 2:

Purchasing First Home - $800,000.000, in Victoria


In this scenario, we are going to assume you're eligible for a stamp duty exemption, but it's not applicable in this scenario because you're purchasing above the Victorian threshold.

Purchase Price (5%)

$40,000.00

Stamp Duty

$43,070.00

Transfer Fee

$1,961.50

Conveyancer

$1,500.00

Adjustments

$1,000.00

Bank Fees

$500.00

Lenders Mortgage Insurance

$26,401.00

Total

$114,432.50

As you can see, larger purchase price means a larger deposit, but there is also a significant impact on LMI as the loan amount is much higher.



How can I avoid Lenders Mortgage Insurance to avoid that LMI Cost?

There are a couple of options available, depending where you live, how much you earn, and what your scenario is. Let's look at the most common options:


Lenders Mortgage Insurance Waivers

Some banks and lenders may waive LMI on home loans with a 5% deposit for professionals in certain industries — commonly legal and medical practitioners, finance and accounting professionals, etc.


These waivers can have a minimum time in role, income requirement or specific role requirement.


Government Assistance

The Home Guarantee Scheme (HGS) is available Australia-wide through participating lenders to support eligible first-home buyers and single parents in purchasing a property through the following schemes:


Lenders Mortgage Insurance Waivers

A Family Guarantee, also known as a Family Home Guarantee or Family Support Guarantee, involves a family member agreeing to secure your home loan. If you can't repay your debt, your family member steps in to cover it. The family member providing this support is called a 'guarantor'.

Our Family Guarantee is structured as two separate loans:

  • Primary Loan: Covers the majority of the property's value, typically 80%. This loan is secured solely by the home you purchase or own.

  • Secondary Loan: Covers the remaining property value, usually 20%. This loan is secured by both the home you buy or own and a portion of the equity in your guarantor's property.


Referencing back our earlier section, as we are increasing the amount of 'security' on the loan, we are reducing the loan ratio below 80%, and eliminating the Lenders Mortgage Insurance.


Now, this isn't a complete list of the schemes and assistance available, but it does cover the major and commonly used options to either reduce the deposit, or eliminate the Lenders Mortgage Insurance Cost.



Wrapping Up


Navigating the deposit requirements for buying a home can be daunting, but understanding your options can make it more manageable. Whether you leverage LMI, qualify for an LMI waiver, or take advantage of government schemes and family guarantees, there are various ways to reduce the financial burden of your home deposit. By exploring and using these options, you can move closer to owning that home as soon as possible.


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