Is a low home loan deposit good?


Is a low home loan deposit good?

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.

The past 6 months

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%.

Loan-to-value ratio rises when deposits drop

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.

The upshot of a high LTV

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:

  • High LTV rations are typically viewed as higher in risk.
  • This means that if a mortgage is approved, it is likely to cost you more.
  • It also means that a lender is likely to require you to purchase lenders’ mortgage insurance, which can be costly.

What do the experts say?

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?

The good news

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:

  • Whether you will be able to realistically afford repayments when interest rates rise. (And they always do, eventually.)
  • Finding a good mortgage broker, who can run the numbers and offer guidance around whether a particular home loan is viable in the long term.*
  • Understanding where you’re at in your financial journey, so you have a strategy for making repayments.
  • Assessing if major events in your life will impact your ability to repay a loan. For example, if you are planning to have a baby and your income is likely to be affected.

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.


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