Owning a home in Australia is a dream for many, but the journey begins with a critical question: How does the size of your deposit impact your home loan interest rate?
Buying a home is no walk in the park. For most of us, this means years of scrimping and squirrelling away some genuine savings. While buying a home with a house deposit as low as 5% of the value of the property is possible with a low deposit loan, a 20% deposit is the norm for a traditional owner-occupier mortgage in Australia. Housing prices might be prohibitively high for many, but saving up more might save you money on ongoing payments.
For one, having a larger deposit than 20% means you have to borrow less from the bank. A large deposit means smaller interest rate repayments, no Lenders Mortgage Insurance (LMI) costs, and easier home loan approval.
OwnHome Deposit Boost Loan
OwnHome is on a mission to remove the deposit hurdle from homeownership for Aussies. By pairing our deposit boost with an 80% LVR home loan, you get to move into your dream home sooner and be a 100% owner. Here's how it works:
How does OwnHome work?
OwnHome provides a deposit loan for a Low Deposit Premium of up to 2.2% of the purchase price (minimum $9,500), so you don't have to wait years before buying your home. Here’s how it works:
You’re stuck renting but want to buy a home. You’ve worked hard and know that you could cover the mortgage payments on a place.
At the moment, you've only saved up $60,000, and to avoid paying lenders ’ mortgage insurance (LMI), you need a 20% deposit ($180,000).
It will take you many more years to save the rest of the deposit amount, even for a low-deposit home loan.
You're really keen on entering the housing market now as you're unsure what the housing market will be like in the long term. Instead of waiting years to reach the 20% deposit amount through saving and renting, you use an OwnHome Deposit Boost Loan.
With an OwnHome Deposit Boost Loan, for a Low Deposit Premium of up to 2.2% of the purchase price (minimum $9,500), plus government fees, we loan you the rest of your 20% deposit. When you pay your Low Deposit Premium upfront, an OwnHome Buyer's Agent is included to help you find your home.
The Basics: Home Loan Interest Rates and Repayments
When you embark on securing a home loan in Australia, understanding the relationship between your deposit size and the interest rate is paramount. Interest rates play a pivotal role in determining your monthly repayments. Generally, a lower interest rate translates to lower home loan repayments over the life of your loan.
What is LVR? How does my deposit impact my LVR?
Enter the Loan-to-Value Ratio (LVR), a critical factor that connects deposit size and property value. LVR is the percentage of the loan amount compared to the property's value.
A lower LVR, achievable with a larger deposit, often leads to lower interest rates. It's a symbiotic dance: a larger deposit reduces the lender's risk, resulting in more favourable interest rates, while a smaller deposit poses a higher risk for the lender.
What is Lenders Mortgage Insurance (LMI)? How does my deposit affect LMI?
For many first-home buyers, accumulating a sizable enough deposit to get on the property ladder can be challenging - especially in big cities like Sydney and Melbourne. Enter Lenders Mortgage Insurance (LMI).
The extra cost of Lenders Mortgage Insurance falls on you if you have less than a 20% deposit saved and need to borrow more than 80% of the purchase price.
While LMI safeguards the lender, it adds an upfront cost to your home loan. This is an extra expense (usually around 2-4% of the loan's value) you’ll need to factor into your calculations when budgeting for a loan for your new home, so saving for a larger deposit will allow you to avoid this additional cost.
So, the larger your deposit, the less likely you need LMI, saving you upfront costs and potentially reducing your interest rate.
What is borrowing power? How does my deposit impact borrowing power?
Your deposit isn't just a ticket to the homeownership party; it's also a key player in determining your borrowing power or buying power. Put simply, borrowing power is the amount of money a home buyer can loan from lenders and banks to buy a property.
A larger deposit often means a higher borrowing capacity, giving you more flexibility in choosing a property and negotiating a favourable purchase price. Other factors affect your borrowing power
Other considerations
Don't forget about additional upfront costs like stamp duty. Additional savings can ease the burden of these costs, providing first-home buyers with more financial breathing room but also taking away from your deposit. Additionally, state First Home Owner Grants (for new homes) and the Australian Government 5% Deposit Scheme can help first home buyers get into the market sooner.
You also must consider your credit score, a crucial element in any home loan application. Your credit score is based on your credit history, such as on-time repayments, not on the size of your deposit. Moreover, having a family member act as a guarantor can mitigate the need for a large deposit while still securing favourable terms.
The deposit size also influences the choice between fixed and variable interest rates. A larger deposit provides more flexibility to explore fixed-rate options, providing repayment stability over a set period.
In the dynamic Australian property market, understanding the nuances of deposit size is a game-changer. Navigating the complexities of deposit size, interest rates, and the myriad of factors involved in a home loan application is where a mortgage broker becomes invaluable. They can help you select the right mortgage type (fixed or variable rate) and loan term for you, as well as an interest rate and comparison rate that works for your financial situation, and guide you through eligibility criteria and lending criteria, securing the best deal tailored to your financial situation.
Whether you're a first-time buyer or looking to refinance, a larger deposit can set you on a path of lower interest rates, reduced upfront costs, and an increased ability to shape your financial future.
