To get a home loan, you need a cash deposit. The deposit covers a percentage of the price of the property you want to buy, while the home loan covers the rest of the property price.
In most cases, home loan lenders will lend up to 80% of the property value, meaning you’ll need to come up with the other 20% (your deposit). For a property of $400,000, for example, you’ll need a cash deposit of $80,000.
$80,000 is a lot of money. When you have rent, bills and groceries to pay for, it’s not easy to save that much. Some lenders understand this and let you borrow more than 80% of the property’s value. Some will lend you up to 95% – meaning your deposit will be 5%, plus the associated purchase costs. This means that if the property you want is $400,000, 5% of that would be a $20,000 deposit – a bit more doable.
Of course, a smaller deposit comes with greater risk. If interest rates rise or unexpected expenses pop up and you’re borrowing at maximum capacity, you could get caught short. Because there’s a greater risk, you’ll need to pay Lenders Mortgage Insurance (LMI) if your deposit is under 20%. LMI is paid to the bank’s insurer to cover the bank in the event you default on your home loan. You can pay your LMI as an upfront cost or, depending on how much LMI you have to pay, you can add it to your home loan amount.
If saving a deposit is challenging and you want to live in your own home sooner, you may be able to get help from a family member who can act as a guarantor on the loan. The guarantor – who must be an immediate adult family member – agrees to use the equity in their property as additional security for your property, instead of a deposit. Keep in mind that your family guarantor may need to have their mortgage with the same bank, so they might have to consider moving their home loan.
As the borrower, you’ll need to be able to repay the home loan like normal. Once you’ve paid off part of the loan or your property has increased in value, you can apply to remove the guarantee. This means your family member will no longer be liable for any default on the repayments.
Find out more about our Family Guarantee option.
As well as the deposit, keep in mind that there are some other upfront costs you’ll need to cover. These include things like stamp duty, home insurance, pest and building inspections, and moving costs. Then there are ongoing costs to consider like council rates and strata fees. To understand a bit more about these costs, see our guide to upfront home buying costs.