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.
Phone: 1300 855 022
Email: clientservices@zippyfinancial.com.au
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.
Connect with Louisa on Linkedin.
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.
