Home loan hot tip: Saving for a larger deposit can save you money
For many of us, savings for a home deposit is no easy feat. In fact, it can take a number of years of putting away money and budgeting to get there.
The truth is, you can take out a home loan with a deposit of as little as 5%. However, it generally comes with extra costs and could end up leaving you more out of pocket over the life of the loan.
That’s why saving up more for a deposit of 20% of the property value (or more) is actually more likely to save you money in the long run.
Simply put, the more you save as a home deposit the less you will have to borrow to buy a property. It ultimately reduces the percentage of the property value you pay interest on.
For home loan customers with a 20% deposit, or 80% Loan to Value Ratio (LVR), lenders won’t charge Lenders Mortgage Insurance and may offer more competitive interest rates.
Plus, the more money you have in your back pocket for a deposit, the easier it is to prove that you have the necessary savings. That way when it comes time to be approved for a loan, you have more chance of being given the green light.
What's a Loan to Value Ratio again?
Your Loan to Value Ratio (LVR) refers to the amount you are borrowing from the bank in relation to the value of the property you intend to buy. So, it’s the value of the property minus the deposit you’ve saved.
Take this for example. Say you saved up a 20% deposit, you would need to borrow 80% of the property value from the bank. Therefore, your LVR would be 80%.
Similarly, if you had a smaller 10% deposit, your LVR would be 90% or if you had a larger 30% deposit your LVR would be 70%.
Ultimately, the larger your deposit on a particular property, the lower your LVR.
So what are the benefits of a lower LVR?
As mentioned above, there are two main benefits of having an 80% LVR or less: no Lenders Mortgage Insurance (LMI) and lower interest rates.
LMI is a type of insurance that lenders take out in order to protect themselves in case a borrower with a small deposit (under 20%) defaults on their loan. This insurance is not designed to cover the borrower, however it is the borrower who is charged this cost. It often adds up to around 2% of the value of the loan - so the bigger the loan the more you pay in LMI.
However, for borrowers who have a deposit of 20% of more, you are not required to pay LMI as you are viewed as a less risky borrower. So if you took out a $600,000 loan with a 20% deposit, you could end up saving around $12,000 in LMI costs.
And what about lower interest rates? Well, a bunch of lenders offer more competitive rates to borrowers who have a 80% LVR or lower. Over the life of a 30-year home loan, a lower rate could end up saving you thousands of dollars in interest repayments.
RELATED ARTICLE: How to save for a home deposit
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Compare Home Loans - page last updated September 22, 2020
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