It is commonly known that the bigger your deposit, the smaller your home loan and therefore the lower your monthly repayments. Today we will investigate another way your deposit size could reduce your repayments: by potentially reducing your interest rate.
A question we are commonly asked is “How can I get a lower interest rate?”
There is 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 how big your deposit is, or more technically, your ‘loan to value’ (LVR) ratio.
What is LVR?
LVR refers to how much of your home’s value you are borrowing.
If you plan to buy a home priced at $600,000 using a deposit of $120,000, you will need to borrow $480,000 or 80% of the property’s value. For lenders, this means you will 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% 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 do not include stamp duty and other up-front costs, which you may also need to budget for.
Average interest rates by LVR
Mozo checked out the average variable rates for different LVRs. As you can see below, for home loans with an LVR of 95%, meaning a 5% deposit, the average variable rate is about 7.38%. Borrowers who can pull together a slightly bigger deposit may see their rate fall. As a guide, on an LVR of 90% (deposit of 10%), the average variable rate falls to 7.13%. That is a potential rate raving of 0.25%. This may not sound like much, but along with lowering your monthly repayments, a lower rate could mean paying less interest charges over the life of your loan.
LVR 95%: average variable rate of 7.38% p.a.
LVR 90%: average variable rate of 7.13% p.a.
LVR 80%: average variable rate of 6.85% p.a.
LVR 70%: average variable rate of 6.81% p.a.
LVR 60%: average variable rate of 6.77% p.a.
How your LVR can see you save in other ways
Your LVR doesn’t just shape the rate you are likely to pay.
If you have a small deposit, usually less than 20%, you could be asked to pay lenders mortgage insurance (LMI). This type of cover protects the lender if you can’t keep up your loan repayments. LMI can be a substantial up-front cost.
There are options for first-home buyers with a small deposit to avoid this expense. For example, the First Home Guarantee Scheme allows eligible buyers to purchase a first home with just a 5% deposit and no LMI.
What if I am refinancing my home loan?
If you are refinancing your mortgage, your LVR will be shaped by home equity. The same basic rule applies. 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 can we help?
With so many loans and lenders to choose from, home loan interest rates can vary widely, and 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 is why it is important to speak to us if you are 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.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer:This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.
What is the Family Home Guarantee?
The Family Home Guarantee is an Australian Government initiative that aims to support eligible single parents with dependants in purchasing a family home.
From 1 July 2021, 10,000 Family Home Guarantees will be made available over four financial years to eligible single parents with dependants, subject to their ability to service a loan.
The Family Home Guarantee can be used to build a new home or purchase an existing home with a deposit of as little as 2 per cent, regardless of whether that single parent is a first home buyer or a previous owner-occupier. Investment properties are not supported by the Family Home Guarantee.
How Does the Family Home Guarantee Work?
Eligible single parents with dependants looking to build a new home or purchase an existing home are able to apply for a loan to purchase an eligible property through a participating lender.
The Family Home Guarantee program is administered by the National Housing Finance and Investment Corporation (NHFIC) on behalf of the Australian Government.
NHFIC guarantees to a participating lender up to 18 per cent of the value of the property, provided the borrower has a minimum 2 per cent deposit, and is eligible for the program.
This will enable single parents with dependants to enter, or re-enter, the housing market sooner.
What Types of Properties are Eligible?
For a property to be eligible under the Family Home Guarantee, it must be a residential property – this term has a particular meaning under the program and is consistent with the First Home Loan Deposit Scheme.
Eligible residential properties generally include:
an existing house, townhouse or apartment
a house and land package
land and separate contract to build a home
an off-the-plan apartment or townhouse
Who is Eligible for the Family Home Guarantee?
Australian citizens who are at least 18 years of age. Permanent residents are not eligible.
Must be a single parent with at least one dependant.
The single parent must have a taxable income that does not exceed $125,000 per annum for the previous financial year. NB: Child support payments are not included as income for the purpose of the income cap.
The single parent must be the only name listed on the loan and the certificate of title.
It is expected that the single parent demonstrate that they are the natural or adoptive parent of a dependent child within the meaning of s.5 of the Social Security Act 1991 (Cth). In a general sense, this means that the person must show that they are legally responsible (whether alone or jointly with another person) for the day-to-day care, welfare and development of the dependent child and the dependent child is in their care. Depending on the terms of any shared custody arrangement, this may enable both individuals in a former couple to separately access the Family Home Guarantee.
Individuals must have at least 2 per cent of the value of the property available as a deposit. If the borrower has a deposit of more than 20 per cent, then the home loan cannot be covered by the Family Home Guarantee.
Loans under the Family Home Guarantee require scheduled repayments of the principal and interest of the loan for the full period of the agreement. The loan agreement must have a term of no more than 30 years.
Applicants must intend to be owner-occupiers of the purchased property. In the case of active Australian Defence Force member applicant(s), the guarantee is not subject to the owner- occupier requirement after entering into the loan if they cannot meet this requirement because of their duties.
Applicants can be either first home buyers or previous owner-occupiers who do not currently own a home. That is, the applicant must not currently have a freehold interest in real property in Australia, a lease of land in Australia or a company title interest in land in Australia.
The eligibility criteria must be satisfied at the time the loan agreement is entered into. More information on eligibility criteria for the Family Home Guarantee will be outlined in forthcoming amendments to the National Housing Finance and Investment Corporation Investment Mandate Direction 2018.
What Property Price Thresholds Apply for the Family Home Guarantee?
The property price thresholds for the Family Home Guarantee will be the same as those applying to the First Home Loan Deposit Scheme.
The capital city price thresholds apply to regional centres with a population over 250,000 (Newcastle & Lake Macquarie, Illawarra (Wollongong), Geelong, Gold Coast and Sunshine Coast), recognising that dwellings in regional centres can be more expensive than other regional areas.
For the territories of Jervis Bay Territory, Norfolk Island, Christmas Island and the Cocos (Keeling) Islands, the relevant price cap is the same as the rest of state cap that applies in the closest State – New South Wales (for Jervis Bay Territory and Norfolk Island) and Western Australia (for Christmas Island and the Cocos (Keeling) Islands).
How to Apply?
Eligible single parents will be able to apply for the Family Home Guarantee through a FHLDS participating lender.
There are no costs or repayments associated with the guarantee. However, eligible single parents are responsible for meeting all costs and repayments for the home loan associated with the guarantee.
NHFIC will not accept applications directly and does not maintain a waiting list for places, including for the additional guarantees to be made available.
Comparison Rate calculated on a secured loan amount of $150,000 for a term of 25 years. WARNING: This Comparison Rate is true only for the example given and may not include all fees and charges. Different terms, fees and other loan amounts might result in a different Comparison Rate. Fees and Charges Apply. Terms and Conditions are available on request.
