A 20% deposit for a home loan used to be non-negotiable in the Australian mortgage market. This was considered the golden down payment.
Times have changed and borrowers can now get approval for loans of as much as 95% of a property’s value in some cases. But making a 20% deposit is still one of the safest ways to secure mortgage approval from banks and other lenders.
Why Do Lenders Prefer A 20% Deposit For Home Loans?
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.
Lenders want to know that you can and will make your repayments for the life of the loan. Contributing a 20% deposit demonstrates that you have a track record of saving. This will give the lender confidence in you and speed along the loan approval process.
The larger the deposit, the lower the risk for the lender.
What Is The Advantage Of Putting 20% Down On A House?
Here are 5 common benefits of putting down 20% on a house:
- Lower interest rates
- Lower total interest expense
- More manageable monthly payments
- Smaller home loan balance
- Avoid paying LMI
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.
Here are some other potential downsides to a 20% deposit home loan, depending on your circumstances:
- Huge exposure to the risk of drop in home values
- Less short-term flexibility
- Benefits might take a while to realise
- Lower rate of return
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.
Waived LMI On A 20% Deposit Home Loan
As mentioned above, a 20% deposit will allow you to avoid paying LMI.
LMI is designed to protect your lender in case you default on your mortgage. The smaller a deposit is on a property, the larger the LVR of the mortgage and the greater the risk for the lender.
Putting down a 20% deposit for a home loan means you start with an LVR of just 80%, limiting the risk for the lender and eliminating the need to pay LMI.
Here are other ways to qualify for an LMI waiver.
I Don’t Have A 20% Deposit, What Are My Options?
If you don’t have a 20% deposit saved for the home you want, you still have plenty of options for getting a home loan.
A monetary/financial gift from your parents or relatives for the sole purpose of buying a property is a great way to help with your deposit. The gift can only be used if it comes with a statutory declaration.
Opt for a joint loan
Buying a property jointly with a co-applicant is a great solution if you can’t afford a higher deposit. Generally, a family member with a stable income is the best choice for a co-applicant. A co-applicant can help you with a 5-10% deposit for the home loan.
First home buyers grant
If you are a first home buyer, many lenders participate in a scheme called the First Home Buyers Grant. This can help you with deposits and other home loan processes.
If a family member owns a property, they can use the equity in their home to help you with your mortgage by making them a guarantor. You can use your guarantor’s property as collateral instead of a deposit. Most lenders will allow only your parents to sign on as guarantors for your home loan.
Low Deposit Home Loan
Luckily, there are lenders than can allow you to borrow over 80% or even 90% of the property value.
You may still qualify for a home loan even if you have a:
How Do I Know If A 20% Deposit Home Loan Is Right For Me?
Apart from the advantages that come with choosing to make a higher down payment, what are other reasons to put down a 20% deposit?
- If you have long-term financial goals
- If you are looking for the best interest rates
- If you aren’t willing to make large monthly payments
- If you are looking to improve your financial habits
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