Buying a home is a significant financial decision that involves understanding a multitude of factors, especially when it comes to finances. One of the most crucial elements you’ll need to consider is the deposit required for a home purchase. But what does this mean for an average Australian? What percentage of the house price is usually required? This comprehensive guide will delve into the typical deposit required for a home purchase, helping to demystify this essential step in the home-buying journey.
Understanding the Basics: What is a Home Deposit?
The deposit is an upfront payment made when purchasing a property. It forms part of the total purchase price and is paid to secure the property. In most cases, this deposit is held in a trust account until the settlement of the sale. The balance of the purchase price is typically financed by a home loan. The deposit amount varies, but in Australia, it typically ranges between 5% and 20% of the property’s purchase price.
Why is a Deposit Required?
The deposit serves two main purposes. Firstly, it demonstrates to the lender your ability to save and manage finances. Secondly, it acts as a security measure for the lender, protecting them in case you default on the loan. The higher the deposit, the lower the risk for the lender, which can lead to more favourable loan terms for the borrower.
How Much is a Typical Home Deposit in Australia?
In Australia, a typical home deposit is about 20% of the property’s purchase price. For instance, if you’re purchasing a property worth AUD 500,000, you should ideally have AUD 100,000 saved as a deposit. However, this is not a hard and fast rule. Some lenders may offer home loans with a deposit as low as 5% (known as a high Loan to Value Ratio – LVR – loan), but this often comes with additional costs and requirements, such as Lender’s Mortgage Insurance (LMI).
Low Deposit Loans
Low deposit loans, where the deposit is less than 20% of the property’s value, can be a viable option for those struggling to save a larger deposit. However, these loans typically require the borrower to pay for Lender’s Mortgage Insurance (LMI), an insurance policy that protects the lender if the borrower cannot repay the loan. The cost of LMI varies depending on the size of the loan and the deposit amount but can add several thousands of dollars to the total loan cost.
The 20% Rule
While it’s possible to buy a house with less than a 20% deposit, there are advantages to saving this amount. Besides avoiding the cost of LMI, a 20% deposit can also give you access to a wider range of loan products and potentially better interest rates. Moreover, it provides a buffer against potential downturns in the property market.
How Can I Save for a Home Deposit?
Saving for a home deposit requires discipline, patience, and a well-considered savings strategy. Here are some tips to help you reach your goal:
- Budgeting: Create a realistic budget that accounts for your income and expenses, and stick to it. Minimise unnecessary spending and maximise your savings.
- High-Interest Savings Account: Consider putting your savings into a high-interest savings account to grow your deposit faster.
- First Home Super Saver Scheme (FHSSS): This Australian Government initiative allows you to save money for your first home inside your superannuation fund. This can help you save faster due to the concessional tax treatment within super.
- First Home Owner Grant (FHOG): Depending on your state or territory, you may be eligible for a FHOG, which can boost your home deposit savings.
Conclusion
Purchasing a home is a significant milestone that requires careful financial planning. The deposit forms an essential part of this journey, helping secure your dream home and demonstrating your financial discipline to lenders. While the typical deposit in Australia is around 20% of the home’s purchase price, it’s possible to secure a home with a lower deposit, albeit with additional costs like LMI.
However, saving for a deposit isn’t an insurmountable task. With a diligent saving strategy, smart financial products, and government schemes like the First Home Super Saver Scheme and the First Home Owner Grant, you can steadily grow your home deposit fund.
Remember, the journey to homeownership is a marathon, not a sprint. Take the time to understand your financial position, explore your options, and seek professional advice if needed. With the right preparation and knowledge, the dream of owning your own home can become a reality.
Lastly, it’s essential to remember that while this guide provides a general overview of the typical deposit required for a home purchase in Australia, the specifics can vary greatly depending on individual circumstances, property values, and lender requirements. Always seek personalised advice from a mortgage broker or financial advisor to understand what is best for your unique situation.
