Applying for a home loan can require a fair amount of research to find a suitable lender offering terms you are comfortable with. You will also need to prepare yourself financially to fulfil the terms offered. This includes estimating your borrowing power, which is the sum of money you can realistically set aside from your salary and use to repay the home loan.
You’ll also need to start saving up well before you apply for the loan to pay the deposit or the down payment. While this payment assures the lender that you are prepared for the responsibility of repaying the home loan, it can also help you control the interest you pay.
How do lenders decide how much deposit for a home loan is required?
The deposit you pay on your home loan can depend on your personal and financial circumstances, but it boils down to how much the lender is willing to let you borrow. Suppose you have had past issues with repaying a credit card or utility bill. Your credit score may have taken a hit as a result of this negative incident, which in turn can make a lender doubt your ability to repay a loan. The lender may ask you to pay a larger deposit in such a scenario or charge you higher interest rates.
Lenders usually describe loan amounts in terms of the loan-to-value ratio or LVR, as a percentage of your home’s value. The average Australian home loan approved by lenders requires borrowers to pay for lenders mortgage insurance (LMI) if they borrow more than 80 per cent LVR. LMI gives the lender a way to recover their money in case you default on, or are unable to repay, the home loan. Paying a 20 per cent deposit can probably help you save thousands of dollars in buying LMI.
You may be one of those professionals who are generally considered low-risk borrowers and therefore qualify for particular home loans which may require paying little or no deposit. Some high-income professionals like barristers or surgeons may be able to get 100 per cent LVR loans requiring no deposit. Even if you aren’t eligible for such a loan, you may be able to get one requiring a deposit as low as 5 per cent, although this may require you to show genuine savings. This can be a sum you’ve continuously put together in your bank account recently, but not a borrowed amount. You need to remember that lenders will need to verify your income before issuing such a loan and, if your income can’t be verified, you could end up having to pay a larger deposit.
How much deposit for a first home loan is recommended?
Although there aren’t any special rules for those applying for their first home loan, you should check whether you have to meet particular home loan criteria. For instance, if you have not applied for any other kind of credit before you may not have a credit score, which can make it difficult for lenders to gauge your potential for defaulting on the loan. They may ask you to pay a higher deposit in this case. On the other hand, you may be able to pay the deposit using a government grant such as the First Home Owner Grant - check with your state or territory government office to learn more about your eligibility.
Also, if you are applying for your first home loan, you may want to consult a financial expert or a mortgage broker to understand the implications of the loan and get the most suitable deal. This can help you avoid situations where you put down a huge deposit as a result of not knowing about alternative lenders or home loan offers. You could also explore how to get preapproved for a home loan so you know how much you can borrow, and give yourself time to save up the deposit. Even finding out how long home loan approval takes can help plan your savings before actually applying for the loan.