How much deposit do I need for a home loan?
- Yellow Loans
- Jan 13, 2022
- 3 min read
Updated: Jan 13, 2022
Your home loan deposit is viewed as your contribution to the purchase of the property you wish to buy.
The size of your deposit for a home loan will determine the kind of loan that you may be able to obtain and the amount of money you can borrow.
Ideally, to avoid additional costs such as Lenders Mortgage Insurance (LMI) and an inflated interest rate, you will need a 20% deposit.
To prove your ability to meet your regular financial obligations and your capacity to pay your home loan repayments, home loan lenders favour genuine savings to go towards the money you need to complete your purchase.
You can also make up your home loan deposit with:
· The First Home Owner Grant
· A home loan guarantor, and
· A cash gift.
Why is the size of my home loan deposit important?
Your deposit for a new home loan, gives the lender of what regular repayments you can afford. Your proof of savings via money saved or deposited into an account over a number of months, rental payments and other regular monthly commitments work together to prove your ability to pay and maintain your regular home loan repayments.
Your home loan provider will consider these along with your sources of income such as wages or salary, investments and dividends to assess how much money they are able to lend you based on their responsible lending responsibilities.
Banks and other home loan providers are not allowed to loan you money that they believe based on their assessment, that you can not afford to pay back without causing you financial hardship.
The reasons why the size of your home loan deposit is important.
It impacts the interest rate lenders may offer - The deposit you have available when you come to apply for your home loan can have an impact on the interest rate of the loan.
The bigger your deposit, the more negotiating power and choice of lenders you may have - If you have a bigger deposit, you may even be able to secure a discounted interest rate from a lender.
It affects how 'risky' you are as a customer, and whether you need to pay Lenders Mortgage Insurance (LMI) - Lenders use a simple Loan to Value Ratio (LVR) calculation to assess how risky they consider you (as a borrower) to be. The loan to value ratio looks at the amount you wish to borrow in relation to the value of the property you're looking to purchase.
The higher this ratio, the more risk for the lender - Generally, if you have an LVR of over 80% (as in you wish to borrow more than 80% of the property's value) the lender will require you to pay an LMI premium. This insures the lender against any losses that may occur in the event you default on your loan.
There are alternatives to paying LMI, such as have a family member act as a security guarantor for your loan.
You pay less interest over the life of your loan - The less money you borrow, the less you have to pay off in the future. This means over the course of the home loan, you’ll also be paying less interest. You stand to save a lot by having a sizeable home loan deposit.
Below you will find some useful links that will provide you with all the information you need to make the best loan decision. In the meantime if you want some free professional assistance, you can contact a loan specialist on 1300 199 964
or
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