How much deposit do you need to buy a house?

The first step to owning a home is to be able to provide a deposit.  This is important for a number of reasons. Primarily real estate agents will need the deposit when you make an offer or bid and win at an auction to secure the property and sign a contract of sale. A lender will also need to see ‘genuine’ savings as they use it to assess your ability to repay a loan.

‘Genuine’ savings is a bank term for money that you have deposited in your bank accounts over a period of time. This is different from an amount of money that suddenly appears in your bank account in a lump sum, or series of large payments. That may require further clarification from the lender as it could be considered a gift, especially if it has been in your account for less than 3 months.

Saving money is difficult, especially when you are starting out on your property journey, maybe paying rent and just beginning your career. Housing costs so much more than it used to be relative to average incomes, and, at times, the cost of a house seems to increase at a rate greater than you can save for the deposit.

If you don’t have a significant deposit saved and need to borrow over 80% of the value of your home (known as the Loan to Value Ratio), you may be required to pay Lenders Mortgage Insurance (or LMI).

LMI is expensive and adds to the loan amount, therefore dilutes your savings. For example, if purchased a property for $600,000 and contributed $100,000 of your own, by time you added all the government stamp duty and other fees, your LVR would be at 90%, then your LMI could be as high as $13,302, which gets added to your loan.

When calculating how much deposit you will need you should also consider additional charges which may apply such as:

Lender charges

Your lender may charge upfront fees such as:

Loan application fee - allow for up to $700. Some lenders will waive this fee.

Lender’s property valuation fees - these could set you back around $300. Again, some lenders will waive these fees.

Lender legal fees – Approximately $1,500 for lenders to manage the process of creating loan documents and meeting their legal obligations.

Government charges

You may be up for government charges including:

Purchase stamp duty – a state government tax paid for transferring the title of a property, calculated on the purchase price. First home buyers may be eligible for significant rebates on stamp duty.

Property transfer fee – a state government charge to register the transfer of title of the property from one person to another.

Mortgage registration fee – an administrative charge imposed by the Land Titles Office or equivalent for registering the lender’s mortgage on the title record for the property.

As you can see, the costs add up quickly, meaning having a 10% deposit doesn’t really equate to 10% once you add the lender’s fees and government charges to the sale price.

Additional costs to consider

Another element to consider is the cost associated in purchasing a property besides the house and interest on the loan. These costs are important to understand as they will come out of savings. It all adds up!

Such costs include legal fees. You will need a conveyancer or solicitor to ensure that all the paperwork is available for settlement. You may also wish to get any property inspected for pests and a building inspection to ensure that it is structurally sound and there won’t be any expensive works required once you purchase.

Note: If you purchase a property without going to auction, you can make these inspections part of your offer conditions. If you buy at an auction, then there are no conditions to purchase. These checks must be conducted prior to the auction.

And then there is moving, cleaning and renovating costs. Removalists can be expensive depending on how many contents you have and how far you are moving. And your new home may need a coat of paint, new carpets or even a new kitchen or bathroom.

It’s also important to remember that if you are moving from a rented property or out of home into your first home, you will also need to start paying council rates and utilities and possibly body corporate fees if you buy a property that is part of a complex, which will impact your weekly disposable income.

And lastly, a lender will require the property to be insured as it forms the basis of their security for the loan.  Home and contents insurance can cost a few thousand dollars a year depending on your property. 

As you can see how much deposit you require is a little more complicated than the 10% that is usually spoken about.  It is a good starting point but aiming for 15% might be a more realistic way to think about it.

If you’re a first home buyer, I’ve created a useful guide to help you understand key aspects of buying your first home..

Remember, a critical aspect to your success is securing your finance and obtaining pre-approval.  To obtain pre-approval or to see how much you could potentially borrow, get started today.