Traditionally, you've needed at least 20% deposit to get a home loan. It's all about loan to value ratios (LVRs).
Loan to value ratio (LVR) – what the lenders look at
When lenders talk about mortgage deposits they refer to loan to value ratio (LVR). LVR is the loan amount divided by the value of the property. Let's say you want to buy a property with a purchase price of $200,000. If you have a deposit of $40,000, your LVR is 80% (160k/200k).
The critical LVR – 80%
The critical LVR figure as far as lenders are concerned is 80%. If you don't have 20% of the purchase price as a deposit, you will generally be required to pay for lenders mortgage insurance (LMI).
Lenders mortgage insurance (LMI) – what is it?
Lenders mortgage insurance provides protection to the lending institution in the event that you default on your home loan. Though lenders mortgage insurance protects the lender, it's paid for by the borrower. It's a one-off charge that gets included in your loan amount or is required to be paid up front.
Lenders mortgage insurance (LMI) – owning a home sooner
You might not like having to pay lenders mortgage insurance but LMI allows people with less than 20% deposit to get into the housing market sooner. By using LMI on a loan, lenders can pass on the risk of a borrower defaulting to a mortgage insurer, so they can offer the same loan amount with less of a deposit.
No deposit home loans or 100% home loans
You might have heard about no deposit home loans or 100% loans. As the name implies, no deposit home loans are where you have no deposit and the lender funds the entire purchase price of the property. You will generally have to pay lenders mortgage insurance, but for some high earners they can be an attractive option. To learn more about home loan deposits, talk to an MFAA member today.