It’s commonly known that the bigger your deposit, the smaller your home loan, and thus, the lower your monthly repayments. But today we’ll look into another way your deposit size could reduce your repayments: by potentially reducing your interest rate.
A question we’re commonly asked (believe it or not!) is “how can I get a lower interest rate?”
There’s no straightforward answer to this one as it usually depends on a myriad of factors, including whether lenders see you as high risk or low risk, the competition in the market at the time and, as we’ll discuss today, how big your deposit is – or more technically, your ‘loan to value’ (LVR) ratio.
What is LVR?
To cut through the jargon, LVR refers to how much of your home’s value you’re borrowing.
If you plan to buy a home priced at, say, $600,000 using a deposit of $120,000, you’ll need to borrow $480,000, or 80% of the property’s value. For lenders, this means you have an LVR of 80%.
Why does this matter?
Well, a bigger deposit lowers your LVR. This in turn helps reduce the risk you represent to a lender.
A loan with an LVR of 80%, for example, may be seen as less risky than one with an LVR of 90%.
As a general rule, lenders tend to reward borrowers for that reduction in risk with a lower home loan interest rate.
But note: these figures don’t include stamp duty and other up-front costs, which you may also need to budget for.
How your LVR can see you save in other ways
Your LVR doesn’t just shape the rate you’re likely to pay.
If you have a small deposit, usually less than 20%, you could be asked to pay lenders mortgage insurance (LMI).
This is a type of cover that protects the lender if you can’t keep up your loan repayments.
As LMI reduces the risk for lenders, it is more likely your loan will be funded with a lesser deposit amount.
However, LMI can be a substantial up-front cost – so a little extra savings towards your deposit may make a noticeable difference.
What if I’m refinancing my home loan?
If you’re refinancing your mortgage, your LVR will be shaped by home equity.
Equity refers to the difference between the current market value of a property and the outstanding balance on the mortgage.
The same basic rule applies.
As a mortgage is gradually paid off, equity typically increases, providing a source of value that can be leveraged for future loans or realized through the sale of the property.
For example, if your home is worth $500,000 and you still owe $280,000 on your home loan, your equity is $220,000.
So the more equity you have in your place, the smaller the loan you may need.
This may help lenders see you as a lower risk (all other things being equal), so chances are you may be offered a lower rate.
How we can help
With so many loan types and features to choose from, home loan interest rates can vary widely.
Yes, your deposit or home equity can play a role in the rate you pay. But a variety of other factors come into play also.
That’s why it’s important to speak to us if you’re buying a first home, your next home, or refinancing.
We can help you find a home loan that’s suited to your needs at a competitive rate in line with your LVR and any other contributing factors.
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