Trying to make your first move in Australia’s current property market is tough with climbing property prices making it increasingly difficult for new homeowners to gain a big enough deposit.

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Traditionally, those who wanted to buy a home without the mandatory 20% deposit were slapped with Lenders Mortgage Insurance (LMI) money paid to protect the bank if things don’t go well with their repayments. This cost can add hundreds of thousands of dollars to your mortgage, increasing your overall interest and taking extra time to pay off your loan.

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Saving enough the required money for a home deposit can seem like an achievable dream for first-home buyers.

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The question is, how much of a deposit do you really need to buy a house in the current housing situation?

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Let’s look at a reasonable home purchase price of $680,000. In today's market it might not get you much for your money, especially in capital cities, even still, a 20% deposit is $136,000. This needs to be money you have available in cash on top of the costs of buying a home, such as a pest inspection and building check, property transfer fees, government fees and conveyancing costs.

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The Australian government has opened a set of assistance schemes starting with the First Home Guarantee to help first home buyers overcome this pretty big hurdle by offering to guarantee as much as 15% of the deposit with the bank, leaving homeowners to foot just 5% of the purchase cost upfront and waive the LMI.

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While that sounds like an easy A, even a 5% deposit on a $680,000 home will be $34,000, so buyers still need to show some spending discipline to make the cut, especially as there are required fees still to be paid which the lender will be taking into account. We’ll get into what your upfront costs are for a property purchase a little later in this post.

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There are also price caps that might make it hard for buyers to qualify in certain areas, which might put pressure on prospective homeowners to buy a less than ideal property or make a purchase in a difficult neighbourhood.

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Before you leap in and put your money down, it’s really important to point out that managing a home loan is a big responsibility that takes careful financial analysis and budgeting to get right.

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While having a helping hand is going to make owning a home possible for many renters, there are some drawbacks to paying a smaller deposit that need to be factored in.

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Bigger deposit versus smaller deposit pros and cons:

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Pros of a bigger deposit

• Pay less, or nothing on LMI
• You have more negotiating power with the bank
• There’ll be less interest to pay in total
• You’ll get in favour with buyers who have a choice over who they sell to

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Cons of a bigger deposit

• You’ll be spending time saving while the property market increases, which can be a vicious cycle if the price hikes continue to outweigh your savings

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Pros of a smaller deposit

• You’ll get into the property market sooner, turning your debt into a leverageable asset you can use down the track
• You’ll stop paying rent and have more to put towards your loan repayments

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Cons of a smaller deposit

• You’ll be required to pay LMI if you don’t qualify for government assistance
• You’ll have fewer loan options
• You’ll be required to pay more interest over the length of your loan because your loan amount will be significantly more

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The difference in the amount you’ll be taking out for a loan is big with a smaller deposit. If we use the example we started with - a $680,000 established property in a city region in NSW:

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With a 20% deposit of $136,000 you’ll loan amount would be $544,000

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Over a 20-year loan at 2.54% (paying $2,894 a month) you would pay back what you owe along with $150,389 in interest for a total repayment of $694,389

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With a 5% deposit of $34,000 your loan amount will be $646,000

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Over a 26-year loan at 2.54% (paying $2,832 a month) you would pay back what you owe along with $237,278 in interest, for a total repayment of $883,278

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The difference between them is $188, 889, however, making a larger repayment over a long period of time might be significantly less painful for some than having to come up with a 20% deposit to secure a home.

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How much deposit will I need to save to get into an Australian property?

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A big factor in determining how much you can afford is how much your ideal property is. If you are not a handy person, buying a ‘renovators delight’ might be more trouble and expense than it’s worth. If there are no properties available in your price range you might have to stay put and continue saving until you can secure at least a 5% deposit on a home that meets your needs.

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What are the upfront costs of buying a home?

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As part of your financial assessment, your lender will take into account your savings as well as the upfront costs that come with buying your first home. You’ll need to prove to them that you have enough for a minimum deposit as well as being able to cover the essential expenses.

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Building and pest inspections

Government transfer free

Mortgage registration

Conveyancing and legal fees

Loan application fee

Stamp duty

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Your lender will be the one putting forward your application for the First Home Guarantee or similar LMI waiver as well as any other concessions you are eligible for like the First Home Owners Grant or stamp duty concessions, so talk to them about eligibility and availability of these.

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To get the most out of concessions and reduce your home purchase expenses you can look at some of the following:

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Buy or build a new home - there are more grants available than ever to help boost the building industry. Some grants apply to previous homeowners, not just first homeowners.

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Qualify as a first homeowner - grants and concessions are available to those that are eligible and can be granted in conjunction with other funding. Cash grants are only available to those buying a new property while those buying existing properties can look to have the stamp duty removed or significantly decreased depending on price caps.

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Buy a cheaper home - grants are capped to certain property prices (depending on your postcode) which means to be eligible you’ll be looking at cheaper properties.

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Look for residential properties as an owner-occupier - lending criteria, LMI fees and stamp duty all increase for an investment property so look to buy your home to live in, at least for the first 12 months.

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What are the Federal Government's first home buyer incentives?

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There are a number of ways the government can assist with buying a home.

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First Home Guarantee

As discussed in this post, the First Home Guarantee is where the government will be the bank guarantee for up to 15% of the loan to remove the high expense of LMI.

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Just to put it into perspective, if you were buying a 680,000 property with a 5% deposit, the LMI would be $35,142.

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With the government removing this barrier it allows renters to enter the market faster and start repaying their mortgage and building their assets.

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Family Home Guarantee

The Family Home Guarantee, is similar to the First Home Guarantee but is specific to single parents. You do not have to be a first homeowner to apply and you can own a home with a deposit as low as 2% in some cases.

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Regional Home Guarantee

The Regional Home Guarantee is another extension of the First Home Guarantee the difference being that it is only available to new homes (never previously sold or lived in) that are located in regional areas. The price caps are yet to be released on these properties, funding begins in October 2022.

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First Home Super Saver scheme

For first home buyers who have made voluntary repayments on their super in the past they can access their super as part of their property deposit. The advantage here is the super payments are not counted as part of income tax, and also gain better interest than being in a bank savings account.

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First Home Owners Grant

Cash grants are available and differ between states as well as regions (region grants are typically more than city ones. Many states have now reduced eligibility to be for new homes, home builds or house and land packages only.

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Stamp Duty Concessions

First home buyers buying an established property as well as those buying a new property or building a home may be eligible to reduce or remove stamp duty costs. This is in addition to other grants or funding you may be eligible for.

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Be sure to check the state government eligibility criteria for details on current grants, concessions and availability before you commit to buying.

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When faced with rapidly-changing markets, holding off a few months to save your deposit may mean housing prices bump out of reach. Talk to a financial advisor or trusted mortgage broker about your options and make sure you carefully budget your expenses and incomes to know what you can comfortably afford to pay, especially if interest rates rise over the course of your loan.