A 20% deposit was historically the non-negotiable golden down payment in the Australian mortgage market. While modern borrowers can sometimes secure loans for up to 95% of a property’s value, contributing a 20% deposit remains one of the safest methods to ensure approval from lenders.
Why Do Lenders Prefer A 20% Deposit For Home Loans?
Lenders favor the 20% deposit because it protects them against default. Contributing this amount proves you have a track record of saving, which gives the lender confidence and speeds up the approval process. Ultimately, the larger the deposit, the lower the risk for the lender.
Most lenders prefer the golden 20% deposit home loan to this date. Paying that amount protects your lender if you default on the home loan.
What Are The Advantages Of Paying A 20% Deposit?
Here are 5 common benefits of putting down 20% on a house:
Lower interest rates
Having a higher deposit might help you negotiate a lower interest rate. A 20% deposit will usually get a lower interest rate on your mortgage loan than a 10% deposit.
Generally, if you can put down a deposit of 20% or more, lenders are more likely to offer you a favourable deal.
Lower total interest expense
When two major effects of a larger down payment – making loan balances smaller and mortgage rates lower – come together, the total interest you pay over the life of a loan is reduced.
Home Loan Experts’ mortgage calculator can help you calculate the total interest you would have to pay for your chosen deposit.
More manageable monthly payments
Monthly payments become less of a burden when you start off with a larger down payment.
A higher down payment reduces your loan balance, mortgage rate and mortgage insurance premium. This contributes hugely to making your monthly payments lower.
Smaller home loan balance
A larger down payment means starting with a smaller loan balance. This plays a role in preserving equity in your home in case market values decline. Furthermore, it helps when you decide to sell your home or refinance in the years to come.
Avoid paying LMI
Having a 20% deposit (which is a Loan-to-Value Ratio (LVR) of 80%), saves you from having to pay LMI. The lower LVR means less risk for the lenders, which is the key to avoiding LMI.
The fact that 20% deposit home loans have benefits doesn’t mean home buyers should always spend every last penny maximising their down payments. There are factors to consider when deciding whether a 20% deposit home loan is your best option.
When Is A 20% Deposit On A Home Loan Not The Best Option For Me?
Despite the multiple ways home buyers can benefit from a 20% deposit, your personal circumstances may make a smaller down payment a better choice for you. For one thing, saving a large deposit takes time, and you might not want to wait, especially if you’re a first home buyer in a hot real-estate market.
Huge exposure to the risk of drop in home values
When the economy crumbles, home values sink as well. This economic slump (if/when it happens), brings higher risks for buyers who make a large down payment, compared with buyers whose down payments are small.
Less short-term flexibility
Saving to make a 20% down payment can sometimes leave you vulnerable to unexpected expenses. A higher down payment could prevent you from maintaining an emergency fund or using the funds for other expenses and goals.
Benefits might take a while to realise
The majority of the benefits of a large deposit accrue for you in the long-term. A higher deposit may not bring in benefits if you plan to move out or sell soon.
Lower rate of return
A higher down payment will limit your home’s return on investment. The less you put down, the larger your potential return on investment will be.
There might also be a few other reasons as to why a 20% deposit is not always the best idea for you. Once you measure the pros and cons of a 20% deposit based on the market, your long-term goals and financial situation, you will have a clear picture of which path to take.
If you want to know whether a down payment of 20% makes sense for your financial situation, contact Home Loan Experts’ mortgage brokers to find out what steps you should take next.
When Is A 20% Deposit Not The Best Option?
Despite the benefits, saving a large deposit takes time and may not be suitable for first home buyers in a hot real-estate market. Here are the potential downsides to a 20% deposit home loan:
- If property values sink, buyers with large down payments face higher financial risk compared to those with small deposits.
- Tying up cash in a deposit can leave you vulnerable to unexpected expenses and prevent you from maintaining an emergency fund.
- Most advantages accrue in the long term, which may not help if you plan to sell soon.
- A higher down payment limits your potential return on investment (ROI) compared to leveraging a smaller amount.
What Are My Options If I Don't Have A 20% Deposit?
If you have not saved the full 20% amount, there are still several ways to secure a home loan:
- Parents or relatives can provide a monetary gift with a statutory declaration.
- A family member can use the equity in their own home as collateral for yours.
- Buying with a co-applicant who has a stable income can bridge the gap.
- Government schemes can assist first home buyers with deposits and costs.
- Some lenders allow borrowing over 80% or 90% with deposits as low as 3% to 15%.
Is A 20% Deposit Right For Me?
Apart from the financial advantages, you should consider a 20% deposit if:
- You have long-term financial goals that align with building equity.
- You are prioritizing the best interest rates available.
- You aren’t willing to make large monthly repayments.
- You are looking to improve your financial habits before committing to a mortgage.
Talk To An Expert
With 50+ lenders on our panel, compare the most beneficial deals for your 20% deposit plans.
Speak with one of our award-winning specialist mortgage brokers by giving us a call on 1300 889 743 or filling in our online enquiry form.