The larger your home loan deposit, the more benefits and savings you can enjoy.
When you apply for a home loan, it’s important that you have your finances in order. In particular, the larger the deposit you have, the better your chances of getting your loan application approved. Not only does a big deposit allow you to pay off a big chunk of the purchase price of a property straight away, it can also lead to an extensive range of other benefits, including avoiding the cost of lenders mortgage insurance (LMI) and allowing you to access a wider selection of loans.
How much deposit do I need?
The deposit amount you need to take out a home loan is determined by each lender and its lending criteria. In the fine print explaining the features of mortgage products, you may have seen the words ‘maximum LVR’ followed by a percentage. LVR stands for loan-to-value ratio, which is a figure that expresses the amount of money you are allowed to borrow on the loan relative to the purchase price of the property.
Many Australian lenders offer loans with a maximum LVR of up to 90% or 95%, which means you would need to have a 10% or 5% deposit saved respectively. However, you would also need to budget for number of other fees that apply when you buy a home, including conveyancing fees, stamp duty and home loan application fees.
In addition, if you borrow more than 80% LVR — that is, if you have less than a 20% deposit saved — most lenders will make it a condition of loan approval that you have LMI. While the idea of insuring your loan might not sound too bad at all, this type of insurance actually protects the lender if you default on your mortgage, but it’s paid for out of your pocket.
That’s why, as a general rule, it’s recommended that you aim to save up at least a 20% deposit before you apply for a mortgage.
What are the benefits of having a larger deposit?
While you don’t always need a big deposit to take out a home loan, saving a large deposit before you apply for a mortgage can have a huge range of benefits. These include:
- Borrowing less. If you can save up a 40% deposit, for example, that’s 40% of the purchase price of a property you can pay off straight away. That means that you borrow less from the bank and pay a whole lot less interest over the life of the loan, which is a big win in anyone’s language.
- No LMI costs. You’ll most likely need to cover the cost of lenders mortgage insurance if you have less than a 20% deposit saved and need to borrow more than 80% of the purchase price. As a general rule, LMI costs around 2% of the value of the loan. This is an extra expense you’ll need to factor into your calculations when budgeting for a loan, so saving a larger deposit will allow you to avoid this additional cost.
- Proof of savings. When you apply for a loan, a lender will usually ask for evidence of a regular savings history over three months or more. Known as genuine savings, this usually takes the form of a bank statement showing your regular contributions into a savings account. And if you have a deposit of 30% or more saved, you’ll be able to provide excellent evidence of your savings ability and make your application more attractive in the eyes of a lender.
- Increase your borrowing power. The more money you have saved, the less risk you represent to a lender. If your bank is confident you’ll be able to comfortably service your loan, your borrowing power will increase and you may be able to borrow more.
- Access special rates and deals. A larger deposit and a lower LVR mean that you may be able to qualify for special loan and interest rate deals that save you even more money. For example, the Mortgage House 50% LVR special is offered to borrowers who have a minimum 50% deposit saved, and it includes flexible features such as the ability to make unlimited extra repayments and a 100% offset account to minimise interest.
- More choice. Saving a larger deposit also allows you to access a wider range of loans, as more borrowing power gives you access to more of a lender’s products.
Tips to save a larger deposit
- Develop a savings plan. Developing a realistic savings plan is a great way to start saving for a deposit. Work out how much money you need to save and then work out a budget. Work out how much money you can afford to put away each week and start building your balance.
- Make regular deposits. Set up a regular direct debit straight from your income into your savings account. This way, you’ll be saving money without realising it, but you can always add in extra lump sums if circumstances allow.
- Consider a high interest savings account. Shop around for an online savings account that offers a great interest rate and minimal or no fees. You may also want to consider a term deposit so that your savings can earn a higher rate of interest.
- Cut back on expenses. If you work out a weekly budget, you should be able to find a few areas where you can cut back on expenses. Do you really need that gym membership you never use? Could you eat at home rather than dine out one night extra per week? You’d be surprised how much you can save once you put your mind to it.
- FHOG. If you’re saving for your first home, remember that states and territories around Australia offer a range of grants and concessions to first-time buyers. The First Home Owners Grant (FHOG) offers useful financial support to many first home buyers, so check to see if you’re eligible.