In almost all cases, first home buyers will need to put down a deposit to secure a home loan or mortgage. However, there are different loan products available, many of which will have varying first deposit requirements. With this in mind, how much do you need to put down as a deposit to secure a loan on your first home?
Buying a First Home with a 20% Deposit
Since first home buyers do not have an existing property, securing a home loan can be difficult. Typically, a home buyer would sell their current property to finance the purchase of the new property, or they may use their current property as security on their new owner occupier mortgage. Unfortunately, both options are not open to first-time buyers.
This is why first-time buyers will often need to put forward a greater house deposit, reducing the percentage of the full purchase price they need to borrow. A deposit of up to 20% of the total purchase price will reduce the loan to value ratio (LVR), which makes the buyer a more attractive candidate for lenders.
Buying a First Home with a 5% Deposit
Not all lenders will require this 20% initial deposit. First home buyers may be able to borrow the funds they need with a far smaller deposit — sometimes as low as 5%. While this may allow you to buy a house sooner, it may also come with disadvantages.
You are likely to have fewer loan options at your disposal if you are restricted by a smaller deposit, and the loan term will be longer, potentially exposing you to rising interest rates. You also represent a greater risk to the lender and will likely have to pay more across the term of the loan as a result (we’ll discuss Lenders’ Mortgage Insurance in more detail below). In addition, there will be stricter lending criteria attached to loan products with a 5% deposit, and you will have to prove that you have a strong credit history with minimal levels of outstanding loan and credit card debt.
Buying a First Home with a 2% Deposit
The Australian federal government can offer assistance to single parents when they purchase a family home. The Family Home Guarantee is provided to first-time homebuyers as well as those who have already purchased a home in the past. As part of the scheme, the government pledges to offer 10,000 Family Home Guarantees to buyers who meet the lending criteria in the financial years between 2021 and 2025.
This means home buyers can potentially access a mortgage with just a 2% deposit in some cases. Those who utilise the scheme may also be able to apply for other forms of assistance when they buy a home, such as home owner grants.
The Advantage of a Bigger House Deposit
It is not necessarily in your interest to find the smallest acceptable deposit requirement possible. By paying a deposit, you are essentially securing a stake in your home upfront. The larger the deposit, the less you will have to pay back on the property loan, which means you can avoid paying additional interest by shortening the loan term.
A deposit of a greater value also reduces the risk for the lender, which means they might not apply Lenders’ Mortgage Insurance (LMI) to your mortgage repayment schedule. If you don’t have to pay LMI, you could find that the property purchase is much cheaper over the full loan duration.
Even if you cannot achieve a 20% deposit immediately, there are advantages to putting down as much as you can. For example, you may be able to remove LMI payments from your loan schedule once you have built up the required level of home equity. By starting off with a higher value deposit, you are significantly closer to reaching this point and reducing your loan payments sooner.
Secure the Ideal First Home Buyer Loan
At Sydney Brokers, we help clients find the home loans they need, whether they are purchasing a property for the first time or building a new home on a plot of land. Our team of mortgage brokers is experienced in helping our clients achieve their property aims across Australia’s state capital cities and in other locations across the country. As Australian Credit Licence holders with a firm commitment to customer service, we are the team you need. Reach out today to get started.
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