Understanding the Correlation Between Deposit Size and Mortgage Rates.
It is widely acknowledged that a larger deposit contributes to a reduced mortgage amount, which in turn translates into lower monthly repayments. However, there is another significant aspect worth exploring — how the size of your deposit could potentially lead to a less burdensome interest rate.
Demystifying Lower Interest Rates
A prevalent query amongst prospective homeowners is the means by which one can secure a reduced interest rate on their mortgage. The answer is not entirely straightforward, as it typically hinges on a variety of elements. These include the lender’s risk assessment, market competition, and importantly, your deposit size, or in technical terms, your ‘Loan to Value Ratio’ (LVR).
Clarifying LVR and Its Importance
LVR is essentially the percentage of the property’s value that you intend to finance through borrowing. For instance, if you aim to purchase a property valued at $600,000 and have a deposit of $120,000, the borrowing amount would be $480,000 — representing an LVR of 80%. A larger deposit diminishes your LVR, and thus, the risk profile for the lender.
Loans with a lower LVR are commonly perceived as being lower risk, prompting lenders to offer more favorable interest rates as an incentive for the lower risk you present.
This does not, however, take into account additional initial costs such as stamp duty.
Interest Rates in Relation to LVR
A review by Mozo reveals that for home loans with an LVR of 95% (indicating a deposit of 5%), the average variable rate is approximately 7.38%. By increasing the deposit, bringing the LVR down to 90%, the average variable rate dips to 7.13%. The implications of this rate reduction extend beyond diminishing monthly repayments; it also means reduced interest payments throughout the loan tenure.
Here’s a quick overview of average rates by LVR:
- LVR 95%: 7.38% p.a.
- LVR 90%: 7.13% p.a.
- LVR 80%: 6.85% p.a.
- LVR 70%: 6.81% p.a.
- LVR 60%: 6.77% p.a.
Additional Savings through Your LVR
Your deposit size affects more than just the interest rate. With a deposit under 20%, you might also be liable for Lender’s Mortgage Insurance (LMI), which safeguards the lender in case of default. LMI can be costly, but certain schemes, like the First Home Guarantee Scheme, alleviate this expense for eligible first-time homebuyers.
The Impact on Refinancing
For those aiming to refinance, the amount of equity in your property will influence your LVR. Similar principles apply: more equity typically means less risk for the lender, thereby possibly resulting in a superior interest rate offer.
Personalized Assistance for Your Home Loan Needs
The home loan market is replete with diverse options and varying rates. While your deposit or home equity is crucial, other factors also play a key role. Professional advice is not just advantageous, but necessary when purchasing or refinancing a home. I can provide valuable guidance, ensuring you secure a mortgage that aligns seamlessly with your financial circumstances and objectives, while taking advantage of the best possible rates corresponding to your LVR and other influential criteria.
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