Understanding How Your Deposit Influences Your Home Loan
When it comes to securing a home loan, the size of your deposit plays a pivotal role in determining not just how much you need to borrow, but also the interest rate youll pay. This relationship primarily hinges on the Loan to Value Ratio LVR, a key metric that lenders use to evaluate the risk of lending you money.
What is Loan to Value Ratio LVR
The LVR is calculated by dividing the loan amount by the propertys purchase price. For example, if youre buying a property worth $500,000 and you have a deposit of $100,000, you would need to borrow $400,000. This results in an LVR of 80% $400,000 borrowed $500,000 property value.
A lower LVR is generally viewed favorably by lenders, as it indicates a lower risk profile for the borrower. As such, borrowers with a lower LVR often enjoy more favorable interest rates.
The Impact of LVR on Interest Rates
Data from platforms like Mozo shows a clear trend: borrowers with lower LVRs receive better interest rates. For instance:
LVR 80% with a 20% deposit: Average variable rate of 6.85% per annum. LVR 90% with a 10% deposit: Average variable rate of 7.13% per annum. LVR 95% with a 5% deposit: Average variable rate of 7.38% per annum.
These figures highlight that increasing your deposit reduces your LVR and therefore can lead to a lower interest rate.
Additional Benefits of a Larger Deposit
Beyond securing a lower interest rate, a larger deposit can also help you avoid Lenders Mortgage Insurance LMI. Typically, if your deposit is less than 20%, resulting in an LVR above 80%, lenders may require LMI to protect themselves against potential default. This insurance can represent a significant upfront cost. However, firsttime homebuyers might have options to bypass this expense through government schemes, such as the First Home Guarantee Scheme, which allows eligible buyers to secure a loan with as little as a 5% deposit without the need for LMI.
Refinancing and Equity
If youre considering refinancing your home, its important to note that your propertys current equity influences your LVR. Increased equity can lower your LVR, positioning you as a lower risk borrower and potentially qualifying you for better interest rates.
For example, if your home has appreciated in value, and you have paid down some of your mortgage, your LVR could improve significantly, opening doors to refinancing options with more favorable terms.
Final Thoughts
While a larger deposit can lead to more favorable loan terms, its essential to balance this with your overall financial situation and homeownership goals. Aiming for a lower LVR and better interest rates is certainly advantageous, but its equally important to maintain a healthy financial buffer for emergencies and future investments.
If youre navigating the complexities of home loans, especially as a firsttime buyer, it may feel overwhelming. But thats where professional guidance comes in handy. Consulting with financial professionals, like those at ActOn Wealth, can provide personalized advice tailored to your unique circumstances. Not only can they help you find the best mortgage deals, but they can also assist in devising a broader financial strategy that aligns with your longterm wealthbuilding plans.
