On the back of home loan deposits in Australia dropping to record lows, we’re asking the question, ‘is a low home loan deposit good or bad’? We realise most of life happens somewhere between the black and white, so we’ll give you the facts, then let you decide.
You may have noticed that minimum deposits for home loans are getting, well, more minimal. In the past 6 months alone, some lenders have dropped their minimum deposit amount to as low as 5%.
In mortgage broker speak; a low deposit means an increase in loan-to-value ratio. (We’ll call it LTV from now on.)
Our friends at investopedia.com define LTV ratio as:
A lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost the borrower more to borrow or he or she will need to purchase mortgage insurance.
Lately, some LTV ratios have risen from 75% to as much as 95%. Data from Australia’s leading comparison website, finder.com.au indicates HSBC, loans.com.au, RAMS, Westpac, Macquarie Bank and Homeloans have recently increased their LVR ratio and in turn, reduced the minimum deposit needed by borrowers to secure a home loan.
The definition of LTV also sheds light on what a low deposit can mean for a borrower. We’ve listed the key points below:
Money expert and spokesperson for finder.com.au Michelle Hutchison was quoted by news.com.au as saying that taking out a loan when deposits and interest rates are low is not a good idea.
“If borrowers are taking on home loans with low deposits, it could be dangerous,” she was quoted as saying.
Naturally, if a borrower overstretches on a loan when interest rates are low, they will be challenged when interest rates go up again.
So is there a solution?
With the cash rate at just 2.25% and low deposits available for approximately 50% of home loans on finder.com.au’s database, a home loan is more accessible than ever – so is there room to take advantage?
The answer is yes.
Taking advantage of low interest rates and deposits can be done; if you’re mindful. That means considering:
We help people around Australia get the most out of low interest rates and low deposit loans. Contact us to book a free discussion with a mortgage broker near you.