How much deposit you need for a $1 million home loan

As the average property price in Australia reaches almost $1 million, there’s a difficult reality that many young people are having to face.

What’s the best way to save for a house deposit? In a word: consistently.

Maybe two words: consistently and persistently.

First, identify the property you want to buy and the price. Second, identify the deposit you need. The best way to do this is to go to a broker and ask: “Based on my current income and credit profile, how much will a lender lend me?”

The third thing you’ve got to do is consider your level of income. Ask yourself: what is my budget to live? Then, how much do I need to put away out of my income every single week or every payday to reach that deposit? That’s the only way you can save for a deposit.

How much deposit do I need for a home loan?

You can get 5 per cent, 10 per cent and 20 per cent deposits. It depends on how much you’re borrowing and that depends on what you’re buying.

If you find something to buy for $500,000 you might be able to borrow 95 per cent, but you need to gather information from your broker: what bank or lender is going to give you 95 per cent, what type of income you’ll need to have?

They’ll be keen to know how long you’ve had that amount of income and your broker will tell you what expenses they’re expecting to see.

The first thing to do is identify the property you want to buy and how much deposit you will need. Picture: David Swift/NCA NewsWire

With all else remaining equal (including time of entry into the market), it is better to get into the property market with a larger deposit. That being said, an example of comparing a 5 per cent and 10 per cent deposit on a $1 million dollar house in the current market is as follows.

A 5 per cent deposit equals $50,000, with a $950,000 loan, the minimum monthly repayments are $3,753.65 a month, over the 30-year loan period this equates to total repayments of $1,351,314.00.

A 10 per cent deposit equals $100,000, a $900,000 loan with a minimum monthly repayment of $3,556.09 would equate to $1,280,192.40, which gives you an interest saving of $71,121.60 with the 10 per cent deposit over the 30 year period.

It’s quite complex, so you need to talk to somebody. You need to sit down with a broker and say: “This is what I want to buy. How much deposit do I need, what income do I need to show, what expenses do I need to show?” And then kick it off from there.

Sit down and work out what you want to buy and how much you will need.

One final word on your deposit. Don’t discount the bank of Mum and Dad. Parents can gift you the all or part deposit and or parental guarantees sometimes can help bridge the deposit gap especially if your parents or guardians have equity in their own home. Again, not all lenders do this so ask your broker.

Get Cashed Up

Created by financial advisor Ben Nash, Cashed Up is news.com.au’s free six-week course to help Aussies get their finances in check. Those who sign up to the budget bootcamp get weekly, step-by-step challenges to improve their financial fitness.

By the end of the six weeks, participants will have set a budget, created a savings plan, learned how to invest, and sorted their superannuation. The interactive course can be started at any time and aims to empower participants to make more informed financial decisions.

How to save for a deposit

You’ve got to be saving money every single week and reducing costs. This is about budgeting and looking at what your costs and discretionary spend are and reducing them. It may mean getting a second job.

To save for a deposit today, you’ve got to be very frugal and you’ve got to make sacrifices.

I know a lot of people – younger people and older people – who manage their expenses, they don’t go and rent a fancy house or apartment while they’re saving, sometimes younger couples go and stay with their parents or they rent a granny flat at the back of their parents’ place. They’re watching every single dollar they can, they absolutely prioritise their saving program.

Saving money involves cutting back while earning more.

It’s more a behavioural thing than it is some trick of investment and when it comes time to borrow, that consistent saving behaviour actually enhances your credit score. You get a better credit outcome when you can demonstrate you’re very good at saving.

Where to put your savings

Once you’ve done this, go and find the highest-yielding deposit account to keep it in. There are lots of high-yielding deposit accounts, most online banks have them, but just be careful that you’re not getting ‘honeymoon deposit rates’.

A honeymoon deposit rate is where it’s high interest at first, then drops down to a really low rate. You’ve got to keep bank shopping all the time to keep your deposit interest rate as high as possible. That’s really important.

Now, let’s talk about compounding interest. This is the way to really accelerate your deposit savings. Simply explained, it’s the interest you make on both your principal savings amount and the interest already paid to you. It’s interest on your interest. Over time, this is the power of compounding interest.

I wouldn’t be investing my deposit into shares or anything like that because at any given time the volatility factor could get you, the share market could drop overnight. I would just hunt down the highest yields for deposits there are and not take risks any other way.

Mark Bouris is a financial advisor who has established a successful career from building disruptive businesses to challenge the market and provide smarter solutions for consumers. Mark is Executive Chairman of Yellow Brick Road Home Loans | @markbouris