How Much Deposit Do I Need for a Home Loan in Melbourne?

Buying a home in Melbourne can be both exciting and challenging—especially when you're trying to figure out how much deposit you need for a home loan. 

House deposits are one of the biggest hurdles for most home buyers, and they can vary depending on the property, the lender, and your personal financial situation. With Melbourne's housing market constantly evolving, having the right deposit could mean the difference between securing your dream home or missing out. 

This is where mortgage brokers come in handy, helping you navigate loan options, and lending criteria that could reduce your upfront costs.

In this guide, we'll break down everything you need to know about home loan deposits in Melbourne in 2024. Let’s get started!

Overview of Melbourne's Housing Market in 2024

Melbourne's housing market remains competitive, with property prices continuing to rise. As of early 2024, the median house price in Melbourne is approximately $860,000, reflecting ongoing demand despite interest rate hikes. 

First-home buyers face increasing pressure as housing affordability continues to be a challenge.

Saving for a deposit is essential, especially in Melbourne’s pricey market. A larger deposit not only reduces the amount you need to borrow but also lowers your overall borrowing costs, such as Lender’s Mortgage Insurance (LMI). 

In a market where property prices are rising, the sooner you can save a substantial deposit, the better your chances of entering the market before prices climb further.

Source: Real Estate Institute of Victoria (REIV), Domain House Price Report 

What is the Minimum Deposit for a Home Loan in Melbourne?

The minimum deposit for a home loan in Melbourne typically ranges from 5% to 20% of the property value, depending on the lender and loan type. If you're aiming for a 20% deposit, you can avoid paying Lender’s Mortgage Insurance (LMI)—a cost designed to protect the lender if you default on your loan. 

However, if your deposit is less than 20%, most lenders will require you to pay LMI, which can add a significant amount to your overall loan costs.

For example, a 5% deposit on a $600,000 home would only be $30,000, but you’ll likely need to budget for LMI on top of that, which could add anywhere from $10,000 to $25,000, depending on the loan.

Factors like loan type, your credit score, and the specific property value can also influence your minimum deposit requirements and whether LMI will apply.

Examples of Deposit Amounts

Here’s a breakdown of the minimum deposit you’d need for homes of different values, both with and without LMI:

                                                             

 Property Value      20% Deposit (No LMI)                             

   $600,000                  $120,000                       

   $500,000                  $100,000                       

   $400,000                  $80,000                         

   $300,000                  $60,000                           

                                             

 Property Value       5% Deposit (w/ LMI)

   $600,000                  $30,000 + LMI

   $500,000                  $25,000 + LMI

   $400,000                  $20,000 + LMI

   $300,000                  $15,000 + LMI

As you can see, while a 5% deposit may seem more accessible, factoring in LMI makes a significant difference. Opting for a 20% deposit eliminates these additional costs and can also lead to lower monthly repayments.

Find out more about how to calculate for the Lenders Mortgage Insurance here.

If you're unsure how much deposit you need for your dream home in Melbourne or how LMI could affect your loan, reach out to LM Connect for expert advice. We're happy to guide you through the process.

How Loan-to-Value Ratio (LVR) Affects Your Deposit

While the minimum deposit for a home loan in Melbourne typically ranges from 5% to 20% of the property value, another key factor that influences your required deposit is the Loan-to-Value Ratio (LVR). Understanding the relationship between your deposit and LVR is crucial when determining the overall cost of your loan.

What is Loan-to-Value Ratio (LVR)?

The Loan-to-Value Ratio (LVR) is the percentage that compares the amount you’re borrowing to the property value. It’s calculated by dividing your loan amount by the property’s value and multiplying by 100. 

(Loan Amount ÷ Property Value) × 100

For example, if your loan amount is $400,000 and the property value is $500,000, the Loan-to-Value Ratio (LVR) would be:

($400,000 ÷ $500,000) × 100 = 80%.

The Difference Between Minimum Deposit and LVR

While the minimum deposit focuses on the amount you need upfront (usually 5% to 20% of the property value), the LVR looks at the ratio of your loan to the property’s worth. These two factors are closely related but serve different purposes:

• Minimum Deposit: This is the actual cash you need to put down when purchasing a property. The larger the deposit, the lower your loan amount will be.
• LVR: Lenders use the LVR to assess the risk of the loan. A lower LVR (meaning a larger deposit) usually results in more favourable loan terms, such as lower interest rates and avoiding Lender’s Mortgage Insurance (LMI).

How LVR Affects Deposit Size

A lower LVR (80% or less) means you’ll need a larger deposit—typically 20% of the property value—but it can help you avoid paying LMI and give you access to more competitive loan conditions. This is the ideal scenario for most buyers, as it reduces both upfront and ongoing costs.

If your LVR is above 80%, meaning your deposit is less than 20%, you’ll face extra costs like LMI, which can add thousands to your total loan. Lenders see higher LVR loans as riskier, and you may also face higher interest rates or stricter lending criteria.

Knowing Loan-to-Value Ratio in Melbourne is vital because it helps determine not just how much deposit you’ll need, but also the broader impact on your loan terms. 

Who Decides How Much Deposit for a Home Loan is Required?

The amount of deposit you need for a home loan is determined by a combination of factors, mainly driven by the lender’s criteria and your personal financial situation. Here's a breakdown of who and what influences the required deposit:

1. Lenders

Banks and financial institutions set the minimum deposit requirements based on their risk assessment. Most Australian lenders typically require a deposit of 20% of the property’s value to avoid Lender’s Mortgage Insurance (LMI). However, they may offer low-deposit home loans with as little as 5% deposit—but this comes with added costs like LMI and potentially higher interest rates.

2. Loan-to-Value Ratio (LVR)

The lender uses the Loan-to-Value Ratio (LVR) to decide how much deposit is required. An LVR of 80% or less (meaning a 20% deposit) is ideal to avoid LMI. For anything above 80% LVR, you’ll need a smaller deposit, but you'll incur higher costs like LMI and possibly face stricter lending terms.

3. Borrower’s Financial Situation

Your credit score, income stability, and overall credit history will also influence the required deposit. Borrowers with a strong financial profile may qualify for lower deposit loans, while those with less stable finances may be asked for a larger deposit to reduce the lender’s risk.

4. Government Schemes

If you're an eligible first-home buyer, government initiatives like the First Home Owner Grant or Home Guarantee Scheme can reduce the amount of deposit you need. These schemes allow for a lower deposit while helping to avoid LMI.

In the end, the lender has the final say on the deposit required, but your financial profile and eligibility for government assistance can influence the amount you’ll need to save and put up for deposit.

If you need help determining how much deposit you’ll need for your specific situation, the team at LM Connect can guide you through the options and ensure you're prepared for your home loan application. 

Additional Costs Beyond the House Deposit: What You Need to Budget For

While saving for a cash deposit is a huge step toward buying a home, it’s only part of the picture. 

Before you climb the property ladder, you’ll also need to prepare for a range of additional costs beyond your deposit. These expenses can catch first-time home buyers off guard if they're not planned for. Here’s what you need to budget for:

• Stamp Duty: This is a government tax based on the property purchase price and can be one of the largest upfront costs. Stamp Duty varies by state, so it's essential to check how much you'll need for your specific type of property and territory government tax obligations. You can estimate these costs using a loan deposit calculator.

• Government Fees & Mortgage Registration Fees: When purchasing a home, you'll need to pay government fees such as mortgage registration fees and title search fees. These may seem small compared to the purchase price, but they add up to your purchase costs and must be budgeted for.

• Settlement Costs: When finalising your property transaction, you'll encounter settlement costs. These can include legal fees, conveyancing fees, and sometimes even adjustments for council rates or utility bills. Planning for these potential upfront costs is key to avoiding surprises during the final stages of your purchase.

• Loan Application & Establishment Fees: Depending on the type of loan and the loan lenders you choose, there may be application or establishment fees. These fees cover the lender’s costs in setting up the loan and can vary widely between different rate home loans.

• Loan Repayments & Interest: Your ongoing loan repayments are influenced by several factors, including the variable interest rate, loan term, and type of loan. Before committing to a larger loan, it’s important to compare loan rates and terms.

• Insurance & Additional Security: Depending on the lender, you may need additional security such as home insurance. This is crucial in protecting both your home and your lender’s interests.

• Credit Report & Credit Criteria: Your credit report and credit cards can also play a role in determining the terms of your loan. Lenders will evaluate your credit criteria to assess your risk level and offer loan terms accordingly.

Transitioning from just focusing on your deposit to understanding these additional costs is essential for first-time buyers. Establishing good saving habits with a clear savings goal and possibly even a term deposit can help you navigate these extra expenses more comfortably.

FAQs

What’s the minimum deposit for a home loan in Melbourne? 

You’ll typically need at least a 5% deposit, though a 20% deposit is ideal to avoid LMI.

What is Lender’s Mortgage Insurance (LMI)? 

LMI protects the lender if you default. It’s required for deposits less than 20%.

Are there any grants available for first-time home buyers?  

Yes, the First Home Owner Grant and Family Home Guarantee are available in Melbourne.

Can I use a gift for my home loan deposit? 

Yes, many lenders accept gifts of money for deposits, but you’ll need a gift letter.

What are the additional costs when buying a home?  

You’ll need to consider Stamp Duty, legal fees, and mortgage registration fees.

How can I improve my chances of loan approval?  

Having a good credit score, a solid savings plan, and reducing debt can help.

Wrapping Up

Buying a home in Melbourne is an exciting journey, and understanding the deposit you need is a big part of getting there. Whether you're saving for a 5% deposit or aiming for the full 20% to avoid Lender’s Mortgage Insurance, having the right plan in place can make a huge difference. 

By considering all the upfront costs, from Stamp Duty to settlement fees, you're already one step ahead.

If you're ready to take the next step or need more personalised advice, reach out to LM Connect. We’re here to help you with all your home loan questions and guide you toward achieving your property goals. Call us at 0423 713 362 or visit LM Connect today!