Deposit options - complete guide for first home buyers in Australia
Are you dreaming of owning your first home but feeling overwhelmed by the deposit requirements? At Buyvest, we understand the challenges first home buyers face when saving for a deposit. The good news is that there are various pathways to homeownership, even if you haven’t saved the traditional 20% deposit. This guide will help you explore different deposit options, ensuring you find the approach that best fits your financial situation and property goals.
The importance of your home deposit
Your home deposit plays a critical role in your property journey. It’s not just about the upfront cost; it affects your future financial stability and the ease of your home-buying experience. Here’s why your deposit matters:
Borrowing Capacity: The size of your deposit directly impacts how much you can borrow and the types of properties you can afford.
Loan Terms: Larger deposits typically result in better interest rates and more flexible loan features, saving you money in the long term.
Ongoing Costs: A larger deposit can reduce or eliminate the need for Lenders Mortgage Insurance (LMI), lowering your monthly repayments.
Financial Discipline: A substantial deposit shows lenders that you’re financially responsible, making you a more attractive borrower.
Equity Buffer: A larger deposit gives you immediate equity in your home, providing financial security if property values fluctuate.
At Buyvest, we guide you through understanding these factors, helping you find the best deposit option that aligns with your goals and ensures a smoother path to homeownership.
Building your deposit over time
The most common way to accumulate a home deposit is through disciplined savings. While it may seem like a long-term effort, with the right strategy, you can make the process easier and more achievable.
Effective saving strategies
To maximize your deposit-building efforts, consider these proven strategies:
Dedicated savings account: Set up a high-interest savings account exclusively for your home deposit. This ensures that your savings are working harder for you.
Automate your savings: Set up automatic transfers from your main account to your deposit account. Consistency is key, and automation makes it effortless.
Create a realistic budget: Track your income and expenses to find areas where you can cut back and allocate more towards your home deposit.
Reduce discretionary spending: Identify non-essential expenses and redirect that money towards your deposit fund. Every little bit adds up.
Increase your income: Look for opportunities to earn extra income, whether through additional employment, side gigs, or overtime.
Utilise windfalls: Allocate bonuses, tax returns, or inheritance directly to your deposit fund to give it a significant boost.
At Buyvest, we’re here to help you develop a strategy that works for your unique financial situation, making homeownership a more achievable goal.
The power of compound interest
Time is your ally when saving for a deposit. By starting early and allowing compound interest to work its magic, even small contributions can grow into a significant amount. Here’s how:
Your money earns interest not only on your original deposits but also on the interest previously earned.
The longer your savings grow, the greater the effect of compound interest.
For example, saving $500 monthly with a 3% interest rate would result in:
$6,083 after one year
$32,323 after five years
$69,871 after ten years
This example demonstrates how consistent saving, paired with compound interest, can significantly boost your deposit over time.
Gifted deposits from family
With property prices rising, many first home buyers are turning to family assistance to make homeownership more achievable. A gifted deposit from family members can be an essential option for those looking to enter the property market without saving the full traditional deposit amount. At Buyvest, we’re here to help you understand how gifted deposits work and guide you through the process, ensuring a smooth and stress-free experience.
How gifted deposits work
A gifted deposit involves a family member (often parents) providing funds to help you with your home deposit. The key benefit of a gifted deposit is that the funds are non-repayable—they are a gift, not a loan. This can make it easier for you to secure the home loan you need.
Here’s what you should know about gifted deposits:
Non-repayable funds: The money is given as a gift and does not need to be paid back.
Documentation: You will need to provide documentation to confirm that the gift is non-repayable.
Lender requirements: While most lenders accept gifted deposits, their policies can vary.
Understanding these requirements is crucial, and Buyvest can help you navigate the process, ensuring that you meet all the necessary criteria.
Lender requirements for gifted Deposits
When using a gifted deposit, lenders generally have a few key requirements to ensure everything is in order:
Gift letter or statutory declaration: A signed letter confirming that the funds are a gift and not a loan.
Gift transfer evidence: Proof that the gift has been transferred to your account (usually with a history of at least three months).
Genuine savings: Most lenders require that you have saved some portion of the deposit yourself, proving you have “genuine savings.”
No legal interest: Confirmation that the gift provider has no claim or legal interest in the property.
Because these requirements can vary between lenders, it’s essential to work with a mortgage broker like Buyvest to ensure you are meeting all the necessary criteria and making the process as seamless as possible.
Legal considerations
Before accepting a gifted deposit, it’s important to consider potential implications and the legal status of the gift. Both you and the gift provider should:
Ensure clear documentation: Proper documentation should be established to avoid any future misunderstandings.
Clarify any informal involvement: Make sure both parties are clear on whether the gift provider expects any involvement in property decisions.
Government schemes for first home buyers
There are several government initiatives designed to help first home buyers enter the property market with smaller deposits. These programs can significantly ease the financial burden of buying your first home. Buyvest is here to help you understand these schemes and guide you through the application process to ensure you make the most of these valuable opportunities.
Stamp Duty Concessions
Although not directly related to your deposit, stamp duty concessions can free up funds to help you save for your deposit. Depending on where you’re buying, you could benefit from:
Full exemptions on properties valued up to a certain threshold.
Partial concessions for properties within specific price ranges.
State-specific programs: Each state has its own set of stamp duty concessions and eligibility criteria.
These savings can amount to significant amounts, making homeownership more affordable.
Home Guarantee Scheme (HGS)
The Home Guarantee Scheme (formerly known as the First Home Loan Deposit Scheme) allows eligible first home buyers to purchase a property with as little as a 5% deposit. This scheme also enables buyers to avoid paying Lenders Mortgage Insurance (LMI), which can save you thousands of dollars.
Key benefits:
Lower deposit requirements: You can purchase with just a 5% deposit, making it easier to enter the market sooner.
Avoid LMI: This scheme helps you save money by avoiding Lenders Mortgage Insurance, despite having a smaller deposit.
Property price caps: The scheme applies to properties within certain price caps, which can vary depending on your location.
Given the limited number of places available each year, timing your application is essential. Buyvest can help you navigate this process to ensure you don't miss out.
Shared Equity Scheme
The Shared Equity Scheme helps eligible Australians buy a home with a smaller deposit. The government contributes up to 40% for new homes or 30% for existing ones.
Key benefits:
Smaller deposit needed (as low as 2%)
Government owns up to 40% (new) or 30% (existing)
No Lenders Mortgage Insurance
Lower monthly repayments
At Buyvest, we’re experts at guiding you through this process - making it easier to secure your home loan and maximise your benefits under the scheme.
First Home Owner Grant (FHOG)
The First Home Owner Grant (FHOG) is a government initiative that provides financial assistance to eligible first-time home buyers. The grant can significantly boost your deposit, making homeownership more achievable.
Key benefits:
One-time payment: The grant typically offers a one-time payment, usually around $10,000 in NSW and varying in each state.
Applicable to new homes or substantial renovations: The grant generally applies to newly constructed homes or homes undergoing significant renovations.
Eligibility criteria and caps: There are specific eligibility criteria and property value caps, which can vary from state to state.
When combined with your savings, the FHOG can make a significant difference in reaching your home deposit goal.
First Home Super Saver Scheme (FHSSS)
The First Home Super Saver Scheme allows you to make voluntary contributions to your superannuation fund for the purpose of saving for your first home. These contributions, along with any associated earnings, can be withdrawn when you’re ready to purchase your home.
Key benefits:
Tax advantages: The scheme allows you to save for your deposit in a concessional tax environment, which can accelerate your savings.
Faster savings: The tax treatment can potentially help higher-income earners save faster for their deposit.
At Buyvest, we can help you understand whether the FHSSS is a good fit for your situation and assist you in using it to your advantage.
Guarantor loans - family support without cash gifts
Entering the property market can be challenging, especially when saving for a deposit feels overwhelming. A guarantor loan offers a unique solution, allowing family members to help you without directly providing cash. At Buyvest, we understand the importance of family support and can guide you through the process of securing a guarantor loan to achieve your homeownership goals.
How guarantor loans work
A guarantor loan involves a family member, often parents, offering their property as security for part of your home loan. This provides the lender with additional security, which can reduce or even eliminate the need for a deposit. Here’s how it works:
Family support: A family member uses equity in their property to guarantee a portion of your loan.
No cash gift needed: The guarantor doesn’t need to provide cash, allowing them to help without liquidating assets.
Reduced or no deposit: This additional security can help you avoid the need for a large deposit, or sometimes any deposit at all.
Avoid LMI: You may also avoid the cost of Lenders Mortgage Insurance (LMI), which can be significant.
Limited liability: The guarantor’s liability is generally limited to the portion of the loan they’ve guaranteed.
Release option: Once you’ve built enough equity through repayments or property value increases, the guarantee can often be released.
This arrangement allows family members to support you in achieving your homeownership goals without the need for cash gifts.
Types of guarantees
There are different types of guarantor loans, each with specific features designed to meet different needs:
Family Security Guarantee: The most common type, where the guarantor provides additional property as security for the loan.
Limited Guarantee: The guarantor only covers a specific portion of the loan, reducing their risk.
Income Guarantee: The guarantor’s income supports the loan serviceability, though this is less common and phased out by most lenders.
Each type of guarantee has different requirements and benefits, depending on the lender. At Buyvest, we can help you understand which option best suits your situation and guide you through the process.
Risks and considerations for guarantors
Being a guarantor is a significant responsibility, and both you and your family member should carefully consider the risks involved:
Risk to guarantor’s property: If you default on your loan, the guarantor’s property is at risk.
Reduced borrowing capacity: The guarantor’s ability to borrow money may be limited while the guarantee is in place.
Potential credit impact: If you miss repayments, the guarantor’s credit rating could be affected.
Family dynamics: Financial difficulties could potentially strain family relationships, so open communication is crucial.
Given the serious nature of this arrangement, it’s important to seek independent financial and legal advice before proceeding with a guarantor loan.
Loans with Lenders Mortgage Insurance (LMI)
If you don’t qualify for government schemes or have access to a guarantor, low deposit loans with Lenders Mortgage Insurance (LMI) are another option that can help you enter the property market. At Buyvest, we can explain how LMI works and help you evaluate whether this option suits your financial situation.
Understanding Lenders Mortgage Insurance (LMI)
LMI is an insurance policy that protects the lender in case you default on your loan. While it’s an additional cost for you, it allows you to enter the market with a smaller deposit. Here’s what you need to know about LMI:
Protection for lenders: LMI protects the lender, not the borrower, in case of default.
Required for loans over 80% LVR: If your loan-to-value ratio (LVR) exceeds 80%, LMI will generally be required.
Cost structure: LMI is either paid as an upfront premium or added to your loan amount, increasing your borrowing.
Cost variation: The cost of LMI depends on factors like the loan amount, LVR, and the lender’s specific policies.
While LMI increases the cost of your loan, it can be a viable solution if you want to buy sooner with a smaller deposit.
LMI cost examples
Here’s an example to show the potential cost of LMI based on different deposit sizes for a $500,000 property:
15% deposit ($75,000): LMI may cost between $5,000 and $8,000.
10% deposit ($50,000): LMI may cost between $8,000 and $15,000.
5% deposit ($25,000): LMI may cost between $15,000 and $25,000.
These costs can vary depending on the lender and insurer, and your individual circumstances will play a role in the final premium.
Weighing the cost against the benefit
When considering whether to pay for LMI, it’s important to assess the pros and cons:
Property value growth: In a rising property market, the cost of LMI may be offset by the capital growth you achieve by entering the market sooner.
Loan repayment impact: A smaller deposit can lead to higher repayments over the life of the loan, so it’s essential to consider whether you can comfortably manage the additional cost.
Renting vs buying: If you're currently renting, paying for LMI may be a worthwhile investment to stop paying rent and start building equity in your own property.
Job stability: Ensure you have the financial security and job stability to manage higher repayments over time.
At Buyvest, we can help you weigh the costs and benefits of LMI, ensuring you make an informed decision that aligns with your financial goals.
Using equity from existing property
If you’re already a property owner, you may have the option to leverage your existing equity to help you purchase another home. This strategy can be a powerful tool for expanding your property portfolio or upgrading your living situation. At Buyvest, we can help you understand how to best use your equity to reach your property goals.
How equity works
Equity is the difference between the current market value of your property and the outstanding balance on your mortgage. For example:
Property value: $600,000
Outstanding loan: $400,000
Total equity: $200,000
However, lenders typically allow you to access up to 80% of your property’s value minus your outstanding loan balance, known as “usable equity.” Here’s how it works:
80% of property value: $600,000 x 80% = $480,000
Usable equity: $480,000 - $400,000 = $80,000
In this example, you could access up to $80,000 of your equity, which may be used for a deposit or purchase costs for a new property. This can be an effective way to unlock funds for your next property investment or home purchase.
Accessing your equity
There are several ways you can access the equity in your current property to fund your next home purchase:
Additional Line of Credit: An additional line of credit provides a flexible facility where you can draw funds as needed. This option is more flexible, allowing you to access funds without having to refinance your entire mortgage.
Cross-Collateralization: This option involves using your existing property as security for the new loan. While it can provide the funds needed to secure the next property, it also means your current home is at risk if you are unable to meet repayment terms.
Refinancing: This involves replacing your current mortgage with a larger loan. You can then withdraw the difference between your current loan balance and the increased loan amount, which can be used for the deposit on your next property.
Each of these methods has its own benefits and potential risks. At Buyvest, we can help you determine the best approach based on your individual financial situation and property goals.
Strategic considerations
Before you decide to use the equity in your property, it's important to take a few factors into account:
Tax Implications: If you plan to transition your existing property from owner-occupied to an investment property, there may be tax implications. It’s crucial to understand the potential impact on capital gains tax and other financial considerations.
Serviceability of Debt: Accessing equity will increase your debt levels, so it’s essential to assess your capacity to service the new, larger loan. You need to ensure that you can manage the increased repayments and maintain financial stability.
Overall Financial Position: Using equity can significantly change your overall financial position. Consider how the additional debt will impact your cash flow, savings, and future financial goals.
Cross-Collateralization Risks: If you use cross-collateralization to secure both properties with the same loan, you risk losing both properties if you default. It’s important to carefully consider the risks associated with this approach.
Due to the complexity of using equity for property purchases, professional financial advice is recommended. At Buyvest, we’re here to guide you through the process, helping you make the best decision for your financial future.
Comparing deposit options
When buying your first home, choosing the right deposit strategy is crucial to achieving your property goals. At Buyvest, we understand that every buyer has unique financial circumstances and aspirations. Below, we compare the various deposit options to help you identify the best path forward, whether you're just starting your property journey or looking to access additional support.
Traditional savings
Advantages
No additional obligations: You won’t have to rely on external support or loans.
Demonstrates financial discipline: Building your deposit over time shows that you can manage money responsibly.
Builds good financial habits: Establishing a disciplined saving routine sets you up for financial success in the long run.
Considerations
Takes time: Saving for a large deposit can delay your purchase, especially when property prices are rising.
Requires consistent discipline: You’ll need to commit to your savings plan, which may involve cutting back on non-essential spending.
Gifted deposits
Advantages
Immediate boost to your deposit: Family support can provide the funds you need quickly.
May help avoid LMI: A larger deposit can reduce the need for Lenders Mortgage Insurance (LMI).
No repayment obligations: The funds are considered a gift, so you won’t need to pay them back.
Considerations
Not available to everyone: Not all families are in a position to offer financial assistance.
May create family expectations: Some family members may have expectations regarding your property decisions.
Lenders may require genuine savings: Some lenders might expect you to contribute a portion of the deposit yourself, which can complicate matters.
Government schemes
Advantages
Reduces deposit requirements: Government initiatives can help first-time buyers with smaller deposits.
Potential LMI savings: Some schemes help avoid LMI, reducing your overall costs.
Tailored for first home buyers: Designed specifically for people like you, aiming to make homeownership more accessible.
Considerations
Eligibility restrictions: Each scheme has specific criteria, including income limits and property price caps.
Limited places available: Some schemes only have a set number of spots each year, so timing your application is crucial.
Property price caps: These caps may limit your choice of properties based on location.
Guarantor loans
Advantages
Minimal or no deposit required: You could potentially buy a home with very little or no deposit.
Potential LMI savings: If the guarantee is sufficient, you may not need to pay for LMI.
Guarantor doesn’t need to provide cash: Instead of giving you money directly, the guarantor uses equity in their property to support your loan.
Considerations
Requires a willing and eligible guarantor: A family member or friend must be willing to assist, and they need to meet lender requirements.
Creates obligations for the guarantor: If you default on the loan, they are responsible for covering the debt.
Potential relationship impacts: Financial strain can sometimes lead to tension in personal relationships, so this arrangement needs careful consideration.
Low deposit loans with LMI
Advantages
Accessible option for most buyers: This is a widely available option for buyers with smaller deposits.
Enables earlier market entry: You can buy sooner, even with a smaller deposit, especially in rising markets.
Considerations
Additional cost of LMI: You’ll need to factor in the cost of LMI, which can be substantial depending on your deposit size.
Higher ongoing repayments: Because of the smaller deposit, your monthly repayments may be higher than with a larger deposit.
Smaller initial equity buffer: A smaller deposit means you start with less equity in your property, which can limit your financial security in the early years of homeownership.
Using existing equity
Advantages
No need for cash savings: You can use the equity in your current property to fund your next home, eliminating the need for cash savings.
Potential tax benefits: If you’re transitioning from an owner-occupied property to an investment property, there may be tax advantages.
Leverages existing assets: This approach allows you to use the value already built up in your property to move forward with your next purchase.
Considerations
Increases overall debt: Using equity increases your total debt, so you’ll need to ensure you can manage the additional repayments.
Requires existing property: This option only works if you already own property with significant equity.
Potentially complex arrangements: Using equity for a new property purchase involves navigating refinancing, lines of credit, or cross-collateralization, which can be complicated.
Frequently asked questions about deposit options
How much deposit do I need to buy my first home?
The amount of deposit you need varies depending on the option you choose:
Home Guarantee scheme: You may buy with as little as a 2-5% deposit.
Shared Equity scheme: You may buy with as little as a 2% deposit.
Guarantor loan: You might enter the market with minimal or no deposit.
Low deposit loans with LMI: Allows purchases with 5-10% deposits.
State-based initiatives: Some programs provide additional deposit assistance. The ideal deposit size depends on your financial situation and eligibility for different schemes.
Can I use multiple deposit sources together?
Yes, it’s common for first home buyers to combine multiple deposit sources, such as:
Personal savings plus a family gift
Savings plus First Home Owner Grant
Equity release plus savings
Guarantor support plus personal contribution Be sure to check with your lender, as policies vary on combining deposit sources.
Do I need genuine savings for a home deposit?
Many lenders require "genuine savings," typically funds saved over at least three months. However:
Some lenders have more flexible policies on genuine savings.
Certain government schemes may waive this requirement.
Guarantor loans often have more flexible approaches.
A consistent rent payment history can sometimes substitute for genuine savings. If genuine savings is an issue, a mortgage broker can help find lenders with more flexible requirements.
How long does it take to save a home deposit?
The time it takes to save a deposit depends on several factors:
Your income and expenses
Your target property price
Local market conditions
Your saving rate and discipline
Whether you're utilising government schemes on average, first home buyers take 4-5 years to save a 20% deposit, but this can be shortened by using government schemes or other deposit options.
Can I use my superannuation for a home deposit?
Through the First Home Super Saver Scheme (FHSSS), you can:
Make voluntary contributions to your superannuation (up to $15,000 per year, $50,000 in total)
Withdraw these contributions (plus associated earnings) for your first home deposit
Benefit from tax advantages within the superannuation system This is different from accessing your existing super balance—it’s a way to save more effectively for your deposit.
What happens if property values fall after I buy with a small deposit?
If property values decline:
You could end up in "negative equity," where you owe more than your property is worth.
Refinancing options may be limited until property values recover.
Selling the property might result in a shortfall you would need to repay. To reduce this risk:
Research the property market carefully before buying.
Choose areas with long-term growth potential.
Consider holding the property through market cycles.
Make additional repayments to build equity faster.
How does a guarantor arrangement get released?
A guarantor arrangement can be released when:
You've built enough equity through repayments or property value increases.
The Loan to Value Ratio (LVR) has reduced to 80% or lower. The release process involves:
Requesting a property valuation.
Applying to the lender for guarantor release.
Refinancing to a standard loan without the guarantee
Can I still get a home loan with a bad credit history?
A poor credit history can make it harder to get a loan, but options are available:
Save a larger deposit (25-30%) to offset the risk.
Use a guarantor to provide additional security.
Work with specialist lenders who accommodate credit issues.
Correct any errors in your credit report.
Wait for 2-5 years for negative listings to have less impact. Improving your credit score will expand your loan options and improve terms.
What's better: paying LMI or waiting to save a 20% deposit?
Whether to pay LMI or wait depends on your circumstances.
Paying LMI may be better if:
Property prices are rising rapidly.
Rent payments are high, similar to mortgage repayments.
You have stable employment and income.
You qualify for time-sensitive first home buyer schemes.
Waiting to save 20% might be better if:
The property market is stable or declining.
You’re still building financial discipline.
Your employment or income is uncertain.
You’re close to reaching the 20% target.
A financial advisor can help you weigh the pros and cons based on your situation.
How do deposit requirements differ for investment properties?
Deposits for investment properties generally involve:
Higher minimum requirements (often 10-20% with LMI).
Stricter genuine savings requirements.
Limited access to government schemes.
Higher interest rates compared to owner-occupied loans.
More conservative property valuations. If you're buying an investment property as your first home, expect to pay a larger deposit than for an owner-occupied property.
Ready to Take the Next Step?
With so many deposit options available, it can feel overwhelming trying to figure out the best approach for your financial situation. At Buyvest, we’re here to help you make an informed decision that aligns with your goals. Whether you’re saving for a deposit, considering government schemes, or looking into guarantor loans, our expert mortgage brokers have the experience to guide you.
Contact Buyvest today to learn more about the best deposit option for your situation, and let’s take the next step toward making your homeownership dreams a reality.
Table of Contents
Building your deposit is possible - one piece at a time.
Combine the right support to unlock your first home.
Important stuff:
Please note that the views and opinions expressed in this post are general information only, and this is not financial advice.
Any advice and information is provided by Buyvest Pty Ltd ABN 91 684 841 496, Australia Credit Licence No. 567392 and is general in nature, for educational purposes only and is not intended to constitute specialist or personal advice. This website has been prepared without considering your objectives, financial situation or needs. Therefore, consider the appropriateness of the advice for your situation and needs before taking any action. It should not be relied upon to enter into any legal or financial commitments. Specific investment advice should be obtained from a suitably qualified professional before adopting any investment strategy. If any financial product has been mentioned, you should obtain and read a copy of the relevant Product Disclosure Statement and consider the information contained within that Statement concerning your circumstances before deciding whether to acquire the product. You can obtain a copy of the PDS by emailing hello@buyvest.com.au. If you want to change your financial circumstances, such as applying for a loan, all loan applications are subject to credit approval.
All information on this website is subject to change without notice.
