Understanding the Basics of Home Loan Deposits

What Deposit Do You Actually Need?

Most lenders will consider a home loan application with a deposit as low as 5% of the property value. The difference between 5%, 10%, and 20% is not just the amount you save, it determines whether you pay Lenders Mortgage Insurance, the interest rate you access, and how many lenders will consider your application.

A 20% deposit places you in the strongest position. You avoid LMI entirely, access better interest rate discounts, and open up the full range of loan products across all lenders. With a 10% deposit, you will pay LMI, but many mainstream lenders remain available and the insurance premium is often manageable. At 5%, your lender options narrow, LMI costs increase, and you need to meet stricter serviceability criteria.

How Lenders Define Genuine Savings

The deposit amount is only part of the equation. Lenders want to see that you have accumulated genuine savings over time, which demonstrates financial discipline and the ability to manage repayments.

Genuine savings typically means funds held in your name for at least three months in a standard savings account, term deposit, or offset account. Gifted funds from family can form part of your deposit, but most lenders require at least 5% to come from your own verified savings. Proceeds from selling shares or other assets can also contribute, though some lenders apply additional scrutiny. A tax refund, inheritance, or the sale of a vehicle usually does not qualify unless the funds have been held in your account for the required period.

Consider a buyer in Mount Waverley who has saved $50,000 over 18 months in a savings account, then receives a $20,000 gift from a parent one month before applying. The lender will treat the $50,000 as genuine savings and the $20,000 as a non-genuine contribution. The application proceeds, but the serviceability assessment and LMI calculation reflect the fact that only a portion of the deposit was self-generated. The outcome depends on which lender is chosen and how the application is structured.

The Role of Lenders Mortgage Insurance

Lenders Mortgage Insurance protects the lender if you default on the loan, and it is charged whenever your deposit is below 20%. The premium is calculated as a percentage of the loan amount and varies depending on your loan to value ratio.

At a 10% deposit, the LMI premium might add several thousand dollars to your upfront costs or be capitalised into the loan. At 5%, the premium increases significantly. Some lenders cap LVR at 90% for certain property types or locations, meaning a 10% deposit becomes the minimum.

LMI is a one-off cost, not an ongoing fee. It does not reduce over time or disappear when your equity reaches 20%. If you are purchasing in Clayton or Mulgrave and planning to refinance in a few years, factor in that the LMI you pay now will not be refunded or transferred. For buyers who intend to build equity quickly through extra repayments or capital growth, starting with a smaller deposit and paying LMI can still make sense if it brings forward the purchase date and allows you to enter the market sooner.

How Deposit Size Affects Your Interest Rate

The interest rate discount you receive is often tiered by LVR. A borrower with a 20% deposit may qualify for a lender's lowest advertised variable or fixed rate, while a borrower at 10% deposit might receive a rate 0.10% to 0.30% higher, depending on the lender and current pricing.

This difference compounds over the life of the loan. On a $500,000 loan, a 0.20% rate difference equates to around $1,000 per year in additional interest. Over five years, that is $5,000. Combined with the LMI premium, the total cost of borrowing with a smaller deposit becomes material. However, if property values are rising or if delaying a purchase by two years to save a larger deposit means paying more for the same property, the lower deposit route may still deliver a better financial outcome.

When comparing home loan options, the advertised rate is only the starting point. The rate you actually receive depends on your deposit, employment type, loan amount, and the lender's appetite for your profile at the time of application.

Using Equity from an Existing Property

If you already own property in Melbourne, you can use the equity in that property as part or all of your deposit for a new purchase. Equity is the difference between the property's current value and the amount you owe on any loan secured against it.

Lenders will typically allow you to borrow up to 80% of the value of your existing property without LMI, meaning you can access the equity above that threshold. If your existing home is valued at $800,000 and you owe $400,000, you have $400,000 in equity. The lender will allow you to borrow up to $640,000 against that property, leaving you with $240,000 in accessible equity before triggering LMI.

This equity can be used as the deposit for an investment loan or a new owner-occupied property. You do not need to sell your existing home, but you do need to service both loans. Lenders assess your income against the total borrowing across both properties, so your borrowing capacity becomes the limiting factor rather than the deposit itself.

Family Guarantee as an Alternative

A family guarantee allows a parent or close relative to use the equity in their own property as security for part of your loan, reducing or eliminating your need for a cash deposit and avoiding LMI.

The guarantee is limited to the amount required to bring your LVR down to 80%, not the full loan amount. Once you have repaid enough of the loan or the property has increased in value to the point where your LVR falls below 80%, the guarantee can be removed and your parent's property is released from the security.

This structure works well for buyers with strong income but limited savings, particularly first home buyers in areas like Glen Waverley or Chadstone where property values are high relative to entry-level incomes. The main risk sits with the guarantor. If you default, the lender can pursue their property to recover the shortfall. The arrangement requires careful discussion and independent legal advice for all parties.

Settlement Costs Beyond the Deposit

The deposit is the largest upfront cost, but it is not the only one. You also need to cover stamp duty, conveyancing fees, building and pest inspections, loan application fees, and any early occupancy or adjustment costs at settlement.

Stamp duty in Victoria is calculated on a sliding scale and varies depending on whether you qualify as a first home buyer or are purchasing an investment property. For a $600,000 property, stamp duty could be anywhere from zero to over $30,000 depending on your circumstances. Conveyancing typically costs between $1,500 and $2,500. Building and pest inspections add another $600 to $1,000.

These costs are not included in the loan amount unless you specifically structure the loan to cover them, which increases your LVR and may push you into a higher LMI bracket. Most buyers are expected to pay these costs from their own savings in addition to the deposit. When calculating how much you need to have saved, add at least 3% to 5% of the purchase price on top of your deposit to cover settlement.

How We Structure Deposit Conversations

When someone contacts us about a home loan application, the first question is not what deposit you have, it is what you are trying to achieve and when. That shapes everything else.

If you are six months away from having a 20% deposit and the market is stable, waiting may be the right call. If property values are rising or you are relocating for work, moving forward with a smaller deposit and paying LMI might deliver a better result. If you are purchasing in an area where lending policy is tighter, such as certain apartment developments or regional locations, a larger deposit may be required regardless of your preference.

We work through your savings, any equity you can access, whether a family guarantee is appropriate, and which lenders will view your profile favourably at your target LVR. The outcome is not generic advice about deposit percentages. It is a clear view of what you can borrow, what it will cost, and how the decision you make now affects your position in two or five years.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions