What can count towards a home loan deposit?

The first step on many a home loan journey is saving up the deposit. Unfortunately, it’s often also a step that many borrowers struggle with, thanks to the high property prices in some Australian cities. Fortunately, there are several methods available to supplement your savings, so you can get your deposit together to buy your property sooner.

Savings

Most lenders prefer that your home loan deposit is made up of money you’ve earned from your job and saved for later – “genuine savings” in banking parlance. By saving money and holding it for some time, you demonstrate the financial discipline that many mortgage lenders look for in a home loan customer. Some lenders will ask for payslips and/or bank statements to prove that your savings are made up of money earned from your job and that you’ve held it for a minimum length of time (often 3 to 6 months or longer).

While you could save up your deposit in a transaction or savings account, you may be tempted to spend this money. An alternative option could be to lock away your savings in a term deposit for a pre-set length of time, or add it to your superannuation fund as non-concessional contributions. Thanks to the First Home Super Saver (FHSS) Scheme, it’s possible to withdraw some of your extra super contributions from your fund in order to buy your first property.

Grants and incentives

Most Australian states and territories offer a First Home Owner Grant (FHOG) of some kind to help Australians to buy their first property. If you fulfil the eligibility criteria, you may be able to add somewhere between $10,000 and $20,000 to your home loan deposit, depending on your location.

Some states and territories don’t offer a FHOG, but will waive or discount stamp duty as an incentive to first home buyers. While this doesn’t help to build your deposit savings, it can help to reduce the other upfront costs of buying a property you’d otherwise have to budget for.

Gifts

You may have come into an inheritance from a relative, or perhaps a generous parent has offered to contribute to your house deposit with money from their own savings.

While this extra cash may help you to meet the minimum balance a lender requires for a home loan deposit, there’s a chance they won’t accept this money unless you’ve held it in a savings account for several months. This proves that the money is “genuine savings” and that you possess the financial discipline to save it for a home loan and not immediately rush out to spend it.

Other assets

Considering that interest rates on savings accounts and term deposits have been on the low side for some time, some Australians are turning to alternative investments in order to grow their wealth and build up a house deposit.

If you’ve invested in shares, cryptocurrencies, or other assets, it may be possible to quickly earn returns, though there’s always a risk that you could lose your money. This is unlike savings accounts and term deposits, which are guaranteed by the government under the Financial Claims Scheme (FCS).

Some lenders will accept investments in shares as proof of genuine savings, provided you’ve held them for several months. However, you’ll likely have to convert your investments back into cash to use them as a deposit on a mortgage.

Guarantors

If you don’t have enough savings available to make up a full 20 per cent deposit on a home loan, you can still buy a property with a deposit as small as 5 per cent in some cases. However, this means you’ll likely be charged for Lender’s Mortgage Insurance (LMI), which can add thousands of dollars in extra upfront costs – the lower your deposit, the more you may pay for LMI.

However, if a parent or similarly close relative agrees to guarantee your mortgage with the value of their own property, you may be able to pay a smaller deposit and get your home loan sooner, all without paying LMI charges. In some cases, a guarantor may be able to help you to get a mortgage while paying no deposit and no LMI at all.

The federal government may also be able to serve as a guarantor, thanks to the First Home Loan Deposit Scheme (FHLDS). This program allows first home buyers who fulfil the eligibility criteria to apply for a mortgage from selected lenders with a 5 per cent deposit and pay no LMI. A recent expansion to the program, the Family Home Guarantee (FHG), allows single parents to apply for their first mortgage with just 2 per cent deposit and pay no LMI. There are a limited number of places available in each of these programs each financial year.

Equity

If you’re not a first home buyer and already own a property, you may be able to use its value in place of a deposit if you want to refinance your home loan, or to purchase a second property as an investment.

You equity is the current value of your property, minus the mortgage owing on it. If your property is located in an area where property prices have risen in recent years, you may find that you have more equity available than you expected.

This could be handy if you originally bought your property with a low deposit and had to pay LMI – if you have more than 20 per cent equity available when you refinance, you won’t be charged for LMI a second time.

If you’re buying a second property as an investment, you may only be able to use a limited percentage of your first home’s equity as your deposit. Also, keep in mind that there are risks involved in this strategy, as if you’re unable to afford the repayments on one property, you could end up losing both.

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