August 25, 2015
Your home loan deposit is viewed as ‘your contribution’ to the purchase price of the property you wish to buy. Your deposit is one of the biggest factors in determining the kind of loan you may be eligible for and the amount you can borrow to buy your home.
Why the size of your home loan deposit matters
It gives the lender an idea of what you can afford to repay regularly
Regular savings deposited into an account over a period of several months, regular rental payments and investments all work together to give lenders an indication of your ability to maintain your home loan repayments. Lenders will look at these and your income sources (salary, investments, dividends) to assess how much money they’re willing to lend to you. Use our borrowing power calculator to get a rough estimate of how much you may be able to borrow.
It impacts the interest rate lenders may offer
The deposit you have available when you come to apply for your home loan can have an impact on the interest rate of the loan. The bigger your deposit, the more negotiating power and choice of lenders you may have. If you have a bigger deposit, you may even be able to secure a discounted interest rate from a lender.
It affects how ‘risky’ you are as a customer, and whether you need to pay Lenders Mortgage Insurance (LMI)
Lenders use a simple Loan to Value Ratio (LVR) calculation to assess how risky they consider offering you the home loan may be. The loan to value ratio looks at the amount you wish to borrow in relation to the value of the property you’re looking to purchase. The higher this ratio, the more risk for the lender. Generally, if you have an LVR of over 80% (as in you wish to borrow more than 80% of the property’s value) the lender will require you to pay an LMI premium. This insures the lender against any losses that may occur in the event you default on your loan. There are alternatives to paying LMI, such as have a family member act as a security guarantor for your loan.
You pay less interest over the life of your loan
The less money you borrow, the less you have to pay off in the future. This means over the course of the home loan, you’ll also be paying less interest. You stand to save a lot by having a sizeable home loan deposit.
What counts towards your home loan deposit?
Genuine savings are savings paid into an account for at least a three month period. Genuine savings are viewed as evidence to the lender that you are capable of making regular payments and therefore capable of maintaining the repayments on a home loan.
Whilst some lenders may offer loans of up to 97% of the property’s value, most will want to see a history of genuine savings to the value of at least 5% of your new home’s value.
Investments, shares, equity in other properties
Making regular deposits isn't the only proof of genuine savings. Lenders will also view the following as proof of genuine savings:
- Term deposits held for at least three months
- Shares held for at least three months
- A gift of money held in an account for at least three months
- Inheritance when held in an account for at least three months
- Equity in an existing property
Gifts of money
With house prices consistently climbing, it’s becoming more and more common for parents and family members to help their children get into the property market with a gift of money.
When a family member does gift the money, the lenders will be looking for proof that this is in fact a ‘gift’ and that you are not expected to repay the money. Lenders will want to see a statutory declaration that the money comes from an immediate family member and is non repayable. Different lenders require different levels of detail around the use of a gift of money, so it’s best to speak with a mortgage broker to see what the specific requirements are.
In general, most lenders will require the money to be held in a savings account for at least three months for it to be considered as genuine savings. However, it’s not always necessary to have the gift deposited for three months as not all lenders require the gift to fall into the ‘genuine savings’ category.
Proof of consistently paid rent (as genuine savings)
For some lenders, your rental repayment history can be used as proof of genuine savings. Lenders will view your rental ledger as proof of genuine savings under certain conditions:
- You are still renting when you apply for the home loan
- You have a minimum of 12 months of rental ledgers within a single property
- You currently lease through a registered property manager or real estate agent.
Only some lenders will accept rental repayment history as genuine savings and many will also require you to have some other proof of savings, either in the form of a gift of money, or regular savings in an account for at least three months. Your mortgage broker will look at your individual circumstances and work with you to identify the lenders that will be able to offer the right loan for your situation.
First Home Owner Grant and your home loan deposit
If you’re eligible, the First Home Owner Grant (FHOG) can be a fantastic bonus when it comes to budgeting for the purchase of your first home. But it’s important to correctly factor the FHOG into your calculations.
The FHOG can be counted as a contribution to the value of your home purchase and so it can be included in calculations of your Loan to Value Ratio (LVR). This means that you may be able to avoid paying Lenders Mortgage Insurance if the FHOG and your genuine savings total at least 20% of your property's value.
However, if you are looking to get the First Home Owner Grant to build a new home on a block of land, you must keep in mind that the grant will not be paid until construction stage, and so you mustn’t factor it into the land purchase.
Your mortgage broker will work with you to assess if you are eligible for the First Home Owner Grant, as regulations and grant value vary from state to state. They will also help you work through your planning if you are looking to buy and build to make sure you’ve correctly budgeted for all aspects of your home purchase. You can take our First Home Owner Grant Eligibility Questionnaire.
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