Understanding Interest Rates: The Impact of Your Deposit Size and LVR
It’s a well-known fact: a larger deposit typically means a smaller mortgage and lower monthly payments. But there’s another key benefit often overlooked – the potential to secure a lower interest rate.
Many people ask us, “How can I get a lower interest rate?” The answer isn’t straightforward. It hinges on various factors, such as the lender’s risk assessment, market competition, and importantly, your deposit size, or more technically, your Loan to Value (LVR) ratio.
So, what is LVR? Simply put, it’s the percentage of your home’s value that you need to borrow. For instance, if you’re buying a $600,000 home with a $120,000 deposit, you’ll borrow $480,000, which is 80% of the home’s value, resulting in an LVR of 80%.
A larger deposit reduces your LVR, diminishing the risk you pose to the lender. Generally, a lower LVR translates to a lower interest rate offered by lenders, as a reward for reduced risk. Remember, this doesn’t factor in additional costs like stamp duty.
Looking at average interest rates for different LVRs, data from Mozo reveals a clear trend. For a 95% LVR (5% deposit), the average rate is around 7.38%. This rate drops to 7.13% for a 90% LVR (10% deposit), indicating a potential saving of 0.25%. Over the loan’s lifespan, this can significantly reduce both monthly repayments and total interest charges.
Interest rates by LVR are as follows *:
- 95% LVR: 7.38%
- 90% LVR: 7.13%
- 80% LVR: 6.85%
- 70% LVR: 6.81%
- 60% LVR: 6.77%
Besides impacting your rate, LVR also affects other aspects. For deposits under 20%, lenders may require lenders mortgage insurance (LMI), an additional cost. However, first home buyers with small deposits can explore options like the First Home Guarantee Scheme to avoid LMI.
For refinancing, your LVR is determined by your home equity. More equity generally means a lower loan requirement, potentially resulting in lower rates.
Choosing a home loan involves considering various factors, including your deposit or equity. We’re here to assist you in navigating these choices, ensuring you find a suitable loan at a competitive rate, tailored to your specific LVR and other relevant factors.
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Note. interest rates are the average at the time of posting *
