Your Finance Adviser

Ready to buy your own home but not sure how much deposit you need to make to get a loan? Relax! There are plenty of options.

If you are a first time home buyer, it would be a relief for you to know that there are no established rules that determine the minimum amount of home loan deposits. The amount of deposit you need to make depends entirely on your chosen lender and their lending criteria.

Now, the question is, if you can get a home loan with lesser deposit, why is there a norm to make a 20% deposit? And, more importantly, how do you decide the right amount of home loan deposit for yourself?

How to calculate your home loan deposit requirement?

The answer is simple. The key to determining the right home loan deposit is to recognize your own affordability. As a general rule of thumb, the bigger deposit you make, the lesser you have to borrow. The lesser principal amount further means that you would be liable for lesser monthly repayments. In addition to this, lenders equate the amount of deposit to the risk profile of the borrower. If you make a larger deposit, the lender is more likely to perceive you as a reliable borrower. Thus, in turn, you would be in a better position to negotiate a lower interest rate. You can use a Borrowing Power Calculatorand Loan Repayment Calculator to evaluate your affordability and liability in terms of monthly repayments and total interest to be paid.

Most people are able to afford a 20% initial deposit, making it the national average. Although, don’t fret in case you cannot make a 20% deposit. As mentioned earlier, there are several lenders who accept a significantly lower deposit. However, you are required to pay LMI (Lender’s Mortgage Insurance) in such cases.

What is Lender’s Mortgage Insurance?

Since approving a loan with a deposit less than 20% is a huge risk at the lender’s part, they need some sort of protection. So, you are required to make a small lump sum payment as insurance at the time of loan settlement. This is known as Lender’s Mortgage Insurance. It protects the lender in case a borrower defaults on his or her home loan. Good news is that if you have a borrowing capacity, then lender will allow you to capitalize LMI in your loan.

However, there are ways that can help you avoid paying LMI. Here is what you can do:

* Opt for Guarantor Loans

Most lenders approve home loan with a smaller deposit and dissolve LMI in case you bring a guarantor into the equation. You can use property of a family member as a security and payback guarantee.

* Refinance Investment Loans

You can refinance investment loans to apply for a top-up loan or borrow cash (up to 80% of your current investment property’s value) to make a deposit. This will reduce your financial burden, allowing you to make a larger deposit.

In case you need further clarification or help in identifying your home loan deposit capacity, get in touch call at 02 8322 6895