The benefits of having 80% LVR

Even though you don’t need a huge deposit to take out a home loan, having a larger deposit has many advantages.
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This is especially true if you can get to 20 per cent or more, which is the magic number where a number of costs are reduced or disappear completely.

With a 20 per deposit, also known as 80 per cent LVR (Loan to Value Ratio), you will get the following specific benefits.

  • No Lenders Mortgage Insurance – LMI protects the lender against the risk that you will default. If you have to borrow more than 80 per cent of the purchase price, you will have to get LMI which typically costs around 2% of the value of the loan. On a $500,000 loan, that is $10,000. If you have a deposit of 20 per cent or more, you can save this entire cost.
  • Lower interest rate – most lenders, including, offer a lower interest rate to borrowers who have an LVR of 80 per cent or less. This is because with more equity in the home, there is less risk that they will lose money if you default. This reduced interest rate can add up to tens of thousands of dollars over the life of the loan.

As well as these specific benefits for having a deposit over 20 per cent, there are a number of general benefits from having a larger deposit that will increase the bigger the deposit gets.

  • Borrow less – it is obvious, but the bigger your deposit, the less you will have to borrow to buy your home. For example, if you can save a 30 per cent deposit, that is 30 per cent of the home’s value that you won’t be paying interest on.
  • More borrowing power  the more money you have saved, the less risk you represent as a borrower. If a lender is confident you’ll be able to comfortably service your loan, you may be able to borrow more.
  • Proof of savings  when you apply for a loan, you will need to show evidence of a regular savings history. If you have managed to save a 20 per cent deposit or more, you will probably have excellent proof of savings.

Whether it comes from saving your income, or from accumulating equity in another property, there are big benefits to having an LVR of 80 per cent or less when you go to take out a home loan. It will save you money, make it easier to get approval for a loan, and give you access to a wider range of products.

Tags: buying a home

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