Deposit requirements determine which loan products you can access and how much you will pay in total borrowing costs.
Most lenders require a minimum deposit of 5% of the property value for owner-occupied purchases, but the amount you contribute affects your loan structure, ongoing costs, and whether you pay Lenders Mortgage Insurance. The decision you face is not just how much to save, but whether to use all your available funds upfront or hold some back for other purposes. That choice depends on your income stability, the property type you are purchasing, and whether you qualify for any deposit assistance schemes.
How Deposit Size Affects Your Loan to Value Ratio
Your deposit determines your loan to value ratio, which is the percentage of the property value you need to borrow. A 10% deposit results in a 90% LVR, while a 20% deposit brings your LVR to 80%. Lenders price their products according to this ratio, with lower LVRs attracting lower rates and reduced fees.
Consider a buyer purchasing in Hawthorn who has saved 15% of the purchase price. They sit in the 85% LVR bracket, which means they will pay Lenders Mortgage Insurance but may still access competitive variable or fixed interest rate products. If they waited another year to reach 20%, they would avoid LMI but potentially face higher property values given Hawthorn's consistent demand driven by its proximity to the CBD and well-regarded school zones.
Lenders Mortgage Insurance and When It Applies
Lenders Mortgage Insurance is charged when your deposit is below 20% of the property value. The insurance protects the lender if you default, but you pay the premium, either upfront or capitalised into the loan amount. The cost varies depending on your LVR, with premiums increasing sharply above 90% LVR.
In our experience, buyers often underestimate how much LMI adds to their upfront costs. A buyer with a 10% deposit might pay several thousand dollars in LMI, while someone with a 15% deposit might pay half that amount. The premium is not refundable if you refinance or sell the property early, so calculating whether it makes sense to wait or proceed with a smaller deposit requires a clear view of your financial position and property market conditions.
Ready to chat to one of our team?
Book a chat with a Mortgage Broker at Traj Finance today.
Genuine Savings and Non-Genuine Deposits
Lenders distinguish between genuine savings and non-genuine deposits. Genuine savings are funds you have accumulated over at least three months in your own accounts, including salary deposits, term deposits, or shares. Non-genuine deposits include gifted funds, tax refunds, or recent windfalls that have not been held for the required period.
Most lenders require at least 5% of the purchase price to come from genuine savings when your deposit is below 20%. Some lenders are more flexible with professional borrowers or those using the First Home Guarantee Scheme, but this is not universal. If you are relying on a family gift to reach your deposit target, speak with a broker early to confirm which lenders will accept that structure and whether you need to demonstrate any portion as genuinely saved.
Deposit Assistance Schemes for First Home Buyers
The First Home Guarantee allows eligible buyers to purchase with a 5% deposit without paying LMI, provided they meet income and property price caps. For Hawthorn buyers, the property price cap may limit which homes qualify, as the suburb's median sits above the threshold for many property types. However, units and smaller dwellings may still fall within the criteria.
The scheme is structured around a limited number of annual places, and allocation operates on a first-come basis. If you are planning to use this option, confirm your eligibility before committing to a purchase, as losing your place after signing a contract creates significant financial risk. A home loan pre-approval provides clarity on your borrowing capacity and confirms whether your intended purchase price aligns with the scheme's requirements.
When Holding Back Deposit Funds Makes Sense
Some buyers can access a larger deposit but choose to retain funds for renovations, furniture, or as an emergency buffer. This decision makes sense when the cost of holding back funds, such as a slightly higher interest rate or LMI premium, is outweighed by the flexibility those retained funds provide.
As an example, a buyer purchasing a period home in Hawthorn may prefer to use a 10% deposit and keep $30,000 in reserve for immediate repairs rather than stretching to a 20% deposit and facing unexpected costs without liquid funds. This approach works well if your income is stable and you have capacity to service the higher loan amount, but it requires careful comparison of the LMI cost against the value of retaining cash.
Offset Accounts and Building Equity After Settlement
Once your loan is active, any surplus funds can be directed into an offset account linked to your variable rate home loan. The balance in the offset reduces the interest charged on your loan without locking your funds away, giving you both flexibility and interest savings.
If you used a smaller deposit to enter the market sooner, an offset account allows you to build equity faster by reducing your effective loan balance. Over time, this can help you reach an 80% LVR without refinancing, which removes the need for LMI on any future borrowing and may qualify you for better rate discounts. For Hawthorn buyers managing ongoing costs in an established suburb with higher rates and utility charges, the offset structure provides measurable value.
How Employment Type Influences Deposit Requirements
Self-employed buyers and those in casual or contract roles often face stricter deposit requirements than those in permanent employment. Some lenders increase the minimum deposit to 10% or 15% for self-employed applicants, while others require a longer savings history to demonstrate financial stability.
If you operate a business or work in a professional services role, loans for professionals or loans for business owners may offer more flexibility around deposit structure and income verification. These products recognise that your income may fluctuate but remain strong over time, and they adjust lending criteria accordingly. Speak with a broker who understands how different lenders assess non-standard income, as this can make a material difference to which deposit level you need to meet.
Call one of our team or book an appointment at a time that works for you to discuss your deposit options and confirm which loan structure aligns with your situation.
Frequently Asked Questions
What is the minimum deposit required for a home loan in Hawthorn?
Most lenders require a minimum deposit of 5% of the property value for owner-occupied purchases. However, you will pay Lenders Mortgage Insurance if your deposit is below 20%, and some lenders may require at least 5% to come from genuine savings.
What counts as genuine savings for a home loan deposit?
Genuine savings are funds you have accumulated over at least three months in your own accounts, including salary deposits, term deposits, or shares. Gifted funds, tax refunds, or recent windfalls that have not been held for the required period are considered non-genuine deposits.
Can I avoid Lenders Mortgage Insurance with a 10% deposit?
You may avoid LMI with a 10% deposit if you qualify for the First Home Guarantee scheme, which allows eligible buyers to purchase with a 5% deposit without paying LMI. Otherwise, LMI applies to deposits below 20% of the property value.
How does my deposit size affect my home loan interest rate?
Lenders price their products according to your loan to value ratio, with lower LVRs attracting lower rates and reduced fees. A larger deposit reduces your LVR and may qualify you for better rate discounts.
Should I use all my savings for a larger deposit or hold funds back?
This depends on your income stability, property condition, and whether the cost of holding back funds, such as a higher interest rate or LMI premium, is outweighed by the flexibility those retained funds provide. An offset account can help you build equity while retaining access to surplus cash.
