Understanding the Basics of Home Loan Deposits

Most lenders require a deposit of at least 5% of the property's purchase price, though the size of your deposit directly affects your interest rate, whether you'll pay Lenders Mortgage Insurance, and which loan products become available to you.

Brighton's median house price sits well above the Melbourne average, which means the dollar amount required for even a modest deposit can feel substantial. A 10% deposit on a property near the foreshore or around Church Street puts you in a different position with lenders compared to a 5% deposit, and understanding that difference before you start searching can save you time and disappointment.

How Lenders Calculate the Deposit You Need

The deposit is the portion of the purchase price you pay upfront, with the loan amount covering the balance. Lenders express this as a loan to value ratio, or LVR, which is the loan amount divided by the property's value. A 90% LVR means you've borrowed 90% and contributed 10% as a deposit.

Lenders also distinguish between genuine savings and gifted or borrowed funds. Genuine savings are funds you've accumulated over at least three months in your own accounts, such as a transaction account, offset account, or term deposit. A buyer who has saved a 7% deposit over twelve months will generally have more loan options than someone who borrowed that amount from family the week before applying, even if the dollar figure is identical.

Consider a buyer purchasing an apartment in one of Brighton's older blocks between the station and the beach. With a 10% deposit and genuine savings covering stamp duty and other costs, they can access owner occupied home loan products from most lenders without paying Lenders Mortgage Insurance. If that same buyer only has 7% saved, they'll pay LMI and likely face a higher interest rate, even if their income and employment history are identical.

Lenders Mortgage Insurance and Why It Changes the Equation

Lenders Mortgage Insurance protects the lender if you default on the loan, and it's typically required when your LVR exceeds 80%. The premium is paid by you, either upfront or capitalised into the loan amount, and it can add thousands of dollars to the total cost.

LMI premiums are calculated based on your LVR and loan amount. A 15% deposit on a property in Brighton attracts a lower premium than a 5% deposit on the same property, and the premium on a property at the upper end of the suburb's price range will be higher in dollar terms than a more modest purchase, even at the same LVR.

Some lenders waive or reduce LMI for certain professions or offer low-deposit loan products with different criteria. If you're a first home buyer, the First Home Loan Deposit Scheme may allow you to borrow with a 5% deposit without paying LMI, though the scheme has property price caps and eligibility requirements.

Deposit Sources Lenders Will and Won't Accept

Not all deposits are treated the same way. Lenders want to see that you can manage money consistently, which is why genuine savings carry more weight than a one-off gift or windfall.

Acceptable sources include savings accumulated over time, proceeds from selling another property, inheritance, or a genuine gift from a family member with a signed statutory declaration. Some lenders will accept a guarantor arrangement where a parent uses equity in their own home to support your deposit, reducing or eliminating the need for LMI.

Lenders typically won't accept borrowed funds, including personal loans or credit card cash advances, as part of your deposit. If you receive a monetary gift, most lenders require a signed declaration confirming the funds are a gift and not a loan that needs to be repaid, as a hidden debt affects your borrowing capacity and changes the lender's risk assessment.

In a scenario where a buyer has received a 5% deposit as a gift but has no savings history, some lenders will still approve the loan but may apply a higher interest rate or stricter conditions compared to a buyer with a documented savings pattern.

How Your Deposit Size Affects Your Interest Rate

The interest rate you're offered isn't just about the loan amount or your credit history. Your LVR plays a significant role, with lenders offering their lowest rates to borrowers with a deposit of 20% or more.

A variable rate home loan with an 85% LVR might carry an interest rate 0.20% to 0.40% higher than the same product with a 75% LVR, depending on the lender. That difference might seem small, but over the life of the loan it adds up. A split loan arrangement, where part of your loan is on a fixed interest rate and part on a variable interest rate, can help manage rate risk, though the LVR still affects the pricing on both portions.

If you're close to the 80% LVR threshold, it's worth asking whether waiting a few more months to build equity or increase your deposit would unlock a lower rate. In our experience, buyers who push to settle quickly with a smaller deposit often pay more in interest and LMI than they would have saved by delaying the purchase.

What You Need Beyond the Deposit

The deposit isn't the only upfront cost. Stamp duty in Victoria is calculated on the purchase price and can run into tens of thousands of dollars for properties in Brighton. First home buyers may be eligible for stamp duty concessions or exemptions depending on the property's value and whether it's new or established.

You'll also need to cover conveyancing fees, building and pest inspections, loan application fees, and settlement costs. If you're applying for a home loan with a low deposit, some lenders require proof that you have savings beyond the deposit to cover these costs, rather than rolling them into the loan.

A buyer with a 10% deposit who has no additional funds for stamp duty and settlement may need to borrow more than 90% of the property's value once all costs are included, which limits the number of lenders willing to approve the loan. Planning for these costs upfront, and discussing them during your home loan pre-approval conversation, gives you a clearer picture of what you can afford.

When a Smaller Deposit Still Makes Sense

Waiting until you've saved a 20% deposit isn't always the right move. If property prices in Brighton are rising faster than you can save, or if rental costs are eating into your ability to build equity, entering the market sooner with a smaller deposit and paying LMI might still put you ahead in the long term.

The trade-off comes down to your circumstances. If you have stable income, a strong savings history, and access to a range of loan products, a 10% deposit with LMI might be manageable. If your employment is less secure or your savings are inconsistent, waiting until you have a larger deposit and more flexibility with lenders could reduce your risk.

Using an offset account linked to your home loan can help you build equity faster once you've settled, even if you start with a smaller deposit. The funds in the offset reduce the interest charged on your loan amount, which means more of each repayment goes toward the principal.

Call one of our team or book an appointment at a time that works for you to talk through your deposit situation and which loan options make sense for your circumstances.

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