Understanding Loan Deposits
Your deposit is one of the most important parts of your home loan application and how much you put down can impact your repayments, fees and how much interest you pay over the term of your loan.
Banks and lenders all have different criteria for assessing and allowing you to use certain money for your deposit. The larger the deposit you’ve saved, the better chance a mortgage broker can negotiate you a lower interest rate or get fees waived. Generally, most banks require a 5% 'Genuine Savings' for your deposit.Summary
- Most lenders require a deposit that is at least 5% of the property price.
- Genuine Savings are savings you have held for at least 3 months
- The larger your deposit, the less interest you’ll pay over the life of the loan
- You can avoid LMI costs with a larger deposit
- There are some options for borrowers without a deposit.
What are Genuine Savings?
Genuine savings are regular savings that you have had in your bank account for at least three months. Banks and lenders use genuine savings as a tool to see if you can demonstrate a pattern of saving, among other criteria. For most lenders, at a minimum, genuine savings have to make up at least 5% of property value.
Existing equity, stocks and other investments can be classified as genuine savings but it’s important to note the exact requirements for Genuine Savings differ from bank to bank. To clarify exactly what genuine savings you have, its best to speak to a Loan Market broker.
What are non-genuine savings?
Non-Genuine savings are viewed as any sum of money you have but haven’t saved over a period of time, 3 months is the standard for most lenders. The most common forms of non-genuine savings are cash from the sale of an asset like a car or house, or cash-gifts from relatives to help purchase a property. Once this money has been in your account for more than 3 months, most lenders will then classify it as genuine savings and it can help lower your LVR.
Advantages of a bigger deposit
The larger your deposit, the faster you’ll pay off your home loan. A larger deposit means that you will have a lower Loan-to-Value (LVR) ratio and you may be able to secure a discounted interest rate from a lender. An additional advantage to having a larger deposit is you will most likely avoid paying the Lenders Mortgage Insurance (LMI), a fee that depends on your loan size and LVR?.
What is Lenders Mortgage Insurance?
If your deposit is less than 20% of your property value, you’re likely to incur a fee called Lenders Mortgage Insurance (LMI). LMI protects the lender if you're unable to repay your loan and the sale of the property doesn't cover the outstanding loan balance. Read more about LMI here.
What if I don’t have a deposit?
There are a few options for borrowers without deposits saved. Read more about guarantor loans here.