Home Loan Deposits: What Not to Do Before You Apply

Treating 20% as the only deposit that counts is a common misstep for home buyers. A 20% deposit is a useful benchmark, but the right deposit depends on your income, your lender and the type of home loan you choose.

How Much Deposit Do You Need for a Home Loan?

Lenders generally apply Lenders Mortgage Insurance (LMI) if your deposit is below 20%, to cover themselves against loss if you default. That makes 20% the usual benchmark, not a fixed rule. Some lenders offer home loans with deposits below 20%, although their lending criteria and LMI requirements vary.

Your deposit is measured as a share of the property value. The loan to value ratio (LVR) is the loan amount divided by that value, so a 20% deposit means an 80% LVR. Lenders also look at your savings history, income and debts when you apply for a home loan, so the deposit is only one part of the assessment. If you are buying your first home, our first home buyers page covers the extra considerations that apply to you.

Mistake One: Assuming LMI Is Always a Bad Idea

LMI is a cost, but paying it can let you buy sooner than waiting to save 20%. It is a one-off cost that protects the lender, not you and not your guarantor. It does not protect you if you fall behind on repayments.

The trade-off is real. LMI is often added to the loan amount, which means you borrow more and pay interest on it. If you refinance while your equity is still under 20%, you might have to pay LMI again with the new lender.

Some buyers avoid LMI through a guarantor or a government scheme. Eligible first home buyers can potentially buy with a minimum 5% deposit through the Australian Government 5% Deposit Scheme without paying LMI. Eligibility rules apply, so check them before you rely on it.

Mistake Two: Ignoring What a Smaller Deposit Does to Your Repayments

A smaller deposit means a bigger loan, and a bigger loan means higher repayments for the life of the loan. The difference is easier to see with numbers.

Consider a buyer who has a deposit of around 10% and expects to borrow $550,000 once LMI and costs are included. At an illustrative rate of 6.75% p.a. on a 30-year principal and interest loan, the repayment is about $3,567 a month. If the buyer waits and lifts the deposit enough to borrow $500,000 instead, the repayment at the same illustrative rate drops to about $3,243 a month. That is roughly $324 less each month.

The buyer then weighed the two paths with a broker. Buying sooner meant higher repayments and LMI. Waiting meant lower repayments but more months of rent and the risk that prices move while they save. They chose to buy sooner and kept a buffer in an offset account, because the higher repayments still fitted comfortably within their budget. You can test your own numbers with our repayments page before you commit to a deposit target.

Mistake Three: Forgetting That the Deposit Is Not the Only Cash You Need

Your deposit is separate from the other costs of buying, so a deposit target that ignores those costs will leave you short at settlement. Moneysmart suggests a savings goal of 20% of the property price plus enough to cover the other costs of buying.

Those costs include stamp duty, which in Victoria is called land transfer duty, along with legal fees and moving costs. First home buyer concessions may reduce some of these costs for eligible buyers, but they depend on the property and your circumstances. Check the current rules with the State Revenue Office Victoria or a broker before you set your budget.

Mistake Four: Spending Savings Before You Know Your Borrowing Capacity

Your deposit and your borrowing capacity work together, so check both before you start inspecting properties in Moorabbin. A large deposit does not help if your income and debts limit how much a lender will approve.

Credit cards and personal loans can reduce what you can borrow, even when you pay them off on time. A lender may assess the card limit, not just the balance. Our borrowing capacity page explains how lenders view these commitments. Getting home loan pre-approval before you bid also tells you a realistic price range, though pre-approval is not a final offer and the lender will reassess your finances at formal approval.

Mistake Five: Choosing a Loan on the Interest Rate Alone

The lowest advertised rate does not always suit your situation. Rate discounts can come with fees, and some lenders restrict features like an offset account or extra repayments.

A variable rate moves with the lender's decisions, so your repayments can rise or fall. A fixed rate gives certainty for a set period but usually limits extra repayments and may involve break costs if you exit early. A split loan sits between the two. Which is right depends on how much repayment certainty you need and how much flexibility you want.

A broker can compare home loan options from lenders across Australia and match them to your deposit size. You can read more about how that works on our home loans page, or speak with a local mortgage broker in Moorabbin.

Call one of our team or book an appointment at a time that works for you. We will look at your deposit, your borrowing capacity and your loan options so you can make a confident move into home ownership.

Frequently Asked Questions