Mortgages, interest rates, and house prices are constantly in the media now and – to be honest – it can all be a little bit overwhelming. There’s no Introduction to Mortgages or Adulting 101 class in school, and it’s hard to find someone who can explain mortgages, and what you need to do to get one, in a clear and simple way. One of the burning questions for many people looking to enter the property market is, “How much of a deposit do I need for a home loan?”
The average Australian saves a 20% deposit for their home. If you are a first home buyer, though, this is a massive barrier to entering the property market and with rising house prices, that is a lot of money! Theoretically, you can purchase a property with a 5% deposit, depending on your lender.
It is important to note that with a deposit of less than 20%, you may have to pay Lenders Mortgage Insurance or “LMI” which can add thousands to your loan. A good compromise would be a 10% deposit, allowing you to enter the market sooner but reduce your LMI. Smart Home Deposit has a handy calculator for you to determine how long it will take for you to save your 10% deposit: https://smarthomedeposit.com.au/calculators.html.
We’re throwing around a lot of numbers here, but you also need to consider the “30% Rule”. For decades, economists have advised that your total housing costs – including insurance, taxes, and utilities – should not exceed 30% of your income. Brokers and banks use this rule to determine the size of your mortgage. If the home you want requires a mortgage greater than 30% of your total income, you may need to consider a cheaper property.
You may have other debt like personal and car loans, and we strongly encourage you to pay off the highest interest debt first! Less debt frees up more of your income to meet that 30% rule, and you can save more money for your deposit.
So, next time you ask yourself: “How much deposit do I need for a home loan?” Remember, your deposit can range from 5% to 20%, but any deposit less than 20% will attract Lenders Mortgage Insurance. Your total housing costs will need to be less than 30% of your total income. And, finally, pay off your highest interest debts first to improve your borrowing capacity!