How a bigger home loan deposit could help save you money

What you’ll learn

• How the size of your deposit impacts the cost of your loan
• What is LVR?
• How your LVR affects the cost of your loan
• How to save for a bigger deposit

 

When you take out a standard home loan, you’ll need to save a deposit to help you secure lending. Saving for a bigger deposit may not be easy, but the bigger your deposit, the less you’ll likely pay over the loan term. Try to aim to save 20% of the value of the house. 

 

This is because a larger deposit means less money you need to borrow from the bank, which in turn may mean, you’ll pay less interest over the life of the loan. 

 

If you manage to save a deposit of 20% or more, there can be other cost savings. You may be able to access more competitive home loan interest rates and lenders won’t charge you Lenders Mortgage Insurance (LMI). You could still be eligible to secure lending with a deposit as low as 5% but you may incur LMI and higher interest rates. This can mean the overall cost of your mortgage will be higher. 

 

Basically, a bigger deposit means a lower mortgage, which could have an impact on your overall financial situation.

 

How the size of your deposit impacts the cost of your loan

The cost of your loan can be broken down into principal and interest payments. Principal payments pay back the loan that you borrowed, and interest payments are what the bank charges you for borrowing the money.  

 

If you want to find out what your repayments might be, use our repayment calculator.  

 

The larger your loan, the bigger each of the principal and interest payments will be. On top of these payments, you may also be required to pay LMI if your loan-to-value ratio is less than 80% (meaning your deposit is less than 20%).  

 

Lenders Mortgage Insurance is a premium that protects the bank if you’re unable to repay your loan. It's paid by the borrower either as a lump sum, or you can choose to add it to your repayments.  

 

Use our stamp duty and LMI calculator to find out how much it could cost. 

 

What’s an LVR? 

Your loan-to-value ratio (LVR) shows the ratio of the value of your property to the size of your loan as a percentage.  

 

LVRs are used to calculate how much deposit you need to be able to secure lending. The lower your LVR, the higher your deposit, the more likely it is you will be approved for a home loan, so it pays to save as much as you can. The minimum deposit to secure lending is 5%, which is an LVR of 95%.  

 

Lenders have their own guidelines around how much money they can lend to home loan borrowers with high LVRs, who have deposits less than 20%. This represents their risk appetite, as high LVRs often means higher risk in lending. 

 

How LVR affects the cost of your loan

The size of your deposit makes a difference to the overall cost of your loan. Here’s an example of two home loans over the same property with low and high LVRs: 

 

80% LVR home loan 

You purchase a property for $500,000 with an 80% LVR. Your home loan of $400,000 has a fixed interest rate of 5% over 30 years. The total interest cost of your loan over the 30-year term is $373,023.

 

Your total monthly repayment for the loan is: $2,148. 

 

95% LVR home loan

You purchase a property for $500,000 with a 95% LVR. Your home loan is $475,000, with a higher fixed interest rate of 5.5% and an LMI cost of $10,000. The total interest cost of your loan over the 30-year term is: $495,919. 

 

Your total monthly repayment for the loan is approximately: $2,723, including LMI payment. 

 

The 80% LVR home loan repayments are $575 less than for the 95% LVR loan each month. The overall interest payment cost for the 95% LVR loan is $122,896 more than the 80% LVR loan. 

 

This example shows that the bigger your deposit, the less you will pay over the term of your loan, and the lower your repayments will be. This is why it pays to save a bigger deposit.

 

How to save for a bigger deposit

Saving a bigger deposit could help you reduce the overall cost of your home loan. Here are some ways that may help increase your deposit amount. 

 

Reduce your spending. Look at your bank statement and decide which costs you could reduce, and which ones you could do without. For example, you may choose to cancel subscriptions, or to reduce your food or entertainment costs.  

 

Set a budget. Planning your budget can help you set realistic spending and savings goals.  

 

Sell things you don’t need. If you have items in the garage or a collection of things you don’t need, selling them could be a quick and easy way to boost your deposit. 

 

Assess your debts. Whether it’s a student loan or credit card debt, adding up your debts and seeing if you can consolidate, or pay them off faster, is a way to free up cash to save for your home loan deposit.

 

Get in touch  

We’re here to help – we can talk to you about saving for a deposit, your home loan repayments, interest rates, and how much you might be able to borrow for your next house. Get in touch! We’d love to hear from you.