The size of your deposit is one of the most important factors affecting your home loan interest rate and the amount you can borrow. How much deposit you are able to put down will also determine the kind of loan you qualify for.
The size of your deposit plays a huge role in your home loan for a number of reasons:
Lower interest rate and lower repayment: Generally, the bigger the deposit, the better the chances you can get a lower interest rate. A lower interest rate means lower monthly loan repayments. Even the slightest difference in interest rate can save you thousands of dollars in the long run. As an example, let us consider a $350,000 home loan with a 25-year loan term.
- Lower depositYou have a deposit of 5% which is $17,500 and an interest rate of 4.06%. The total interest you’ll pay for 25 years is $197,328 with a monthly repayment of $1,766.09
- Higher depositWith a 20% deposit of $70,000, you will be able to save $50,471 in interest. You’ll also have a lower monthly repayment of $1,422.86.
No more LMI: Some lenders require a minimum home loan deposit of just 5% of the purchase price but, if that is all you have, you will need to pay for pricey lender’s mortgage insurance or LMI. LMI is used to protect the lender just in case you default on the loan. If you are able to put down more than 20%, you don’t need to pay for LMI anymore. The cost of LMI will vary depending on the price of your home, your location, and your profile as a borrower.
How much deposit do I need for a home loan?
This depends upon the lender. Lender use loan-to-value or LVR calculations to assess how risky you are as a borrower. LVR consists of the amount you want to borrow and the value of the house you want to buy.
Generally, the higher the LVR the more risky you are to the lender which is why you are required to pay for Lender’s Mortgage Insurance. You can easily calculate your LVR by simple dividing the loan amount by the property value.
Make sure that you have genuine savings of at least 10% that is held in the bank for three months to help get your home loan approved quicker. There are tons of strategies on how you can start saving up for a deposit. Just read our Top 5 Strategies to Save For A House to get you started.