Home loans: The cheapest rates based on the size of your deposit

Size matters if you’re in the market for a home loan. Right now, borrowers with a decent deposit are being rewarded with some of the lowest interest rates on record. Canstar tracked down the cheapest loans on its database based on different deposit sizes.

Having a big deposit, or a solid chunk of home equity if you’re refinancing, has always been a money-saver. It means you need to borrow less, which reduces monthly repayments, and it’s a sure way to cut thousands of dollars off the long-term interest cost of your loan. If you can pull together a deposit of more than 20%, it’s also possible to avoid lenders mortgage insurance (LMI), another big saving.

At present, home buyers and refinancers have another good reason to stump up a supersized deposit. It could see you secure some of the lowest home loan rates ever seen in Australia. With a 30% deposit for instance, you could pay just 2.29% (comparison rate 2.32%) with Reduce Home Loans.

Why lenders love a big deposit

In today’s market, banks have a real incentive to chase borrowers with big deposits. To begin with, 703,000 Australians have taken up the option to defer their loan repayments during COVID-19 according to the Australian Banking Association. It means lenders are collectively sitting on $211 billion worth of home loans that are generating zero cash flow. So, they are hotly competing for new business – but not just any business.

Faced with an uncertain property market and rising jobless numbers, banks are being more cautious about who they lend to – and how much they lend. Susan Mitchell, CEO of Mortgage Choice, told Canstar some lenders are tightening their loan to valuation ratios – that’s the percentage of your home’s value you can take out as a loan.

Ms Mitchell said that lenders are asking for confirmation from loan applicants that their income and employment have not changed substantially as a result of COVID-19. “If their income has changed, lenders are considering the ability for the applicant’s income to return to what it was – and how long that may take,” added Ms Mitchell.

The conservative approach to your income goes a step further. In the past, banks may have taken 100% of non-core income like overtime, bonuses and commissions into account when looking at your ability to repay a home loan. These days, Ms Mitchell said they may only consider 60%-80% of this type of alternative income when you apply for a loan.

It’s all about lenders aiming to reduce their risk. And one factor that can lower your risk rating, is the size of your deposit.

 

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The savings can really stack up for borrowers

The bigger your deposit, the more equity you have in your home from day one. So, it would take a bigger fall in house prices before you face the unpleasant prospect of negative equity. That’s where you owe more on your home loan than the property is worth.

The Reserve Bank has found that negative equity can be the trigger point at which borrowers start to default on their loan. This may explain why lenders are trying to attract big-deposit borrowers with the enticement of lower interest rates.

Cheapest loans if you have a 10% deposit

Let’s say for example, that you buy a $500,000 property using a 10% deposit of $50,000 and a loan for $450,000. With this level of deposit, you could be up for LMI of around $9,585 according to the Genworth LMI premium estimator. In terms of loan rates, Canstar’s database shows the cheapest rate for a 10% deposit is 2.39% (comparison rate 2.40%) with TicToc Home Loans. At that rate, your monthly repayments would likely be $1,994, and over a 25-year loan term you could pay $148,181 in total interest charges.

Top 3 Lowest Rate Owner Occupier Variable Home Loans with a 10% Deposit
Lender Product Rate Comparison Rate
TicToc Home Loans Live-in Variable P&I 2.39% 2.40%
Pacific Mortgage Group Variable P&I 2.44% 2.44%
Reduce Home Loans Rate Buster Variable 80-90% 2.55% 2.55%
Source: www.canstar.com.au – 1/06/2020. Based on variable owner occupier loans available for a loan amount of $400,000, 90% LVR and principal & interest repayments. Table sorted in ascending order by rate.  Comparison rates calculated based on a $150,000 loan amount over a total loan term of 25 years.

Cheapest loans if you have a 20% deposit

If you can drum up a 20% deposit of $100,000, the cost of LMI drops to $1,915. You may also be eligible for a rate of 2.39% through Homestar Finance or Reduce Home Loans (comparison rate 2.39%), which could push your monthly repayments down to $1,772 – a saving of $245 each month. The overall interest charge would be about $131,717, leaving you better off by more than $16,000 over the loan term.

Top 3 Lowest Rate Owner Occupier Variable Home Loans with a 20% Deposit
Lender Product Rate Comparison Rate
Homestar Finance Star Essentials 80% OO 150-850k 2.39% 2.39%
Reduce Home Loans Rate Slasher <80% 2.39% 2.39%
TicToc Home Loans Live-in Variable P&I 2.39% 2.40%
Source: www.canstar.com.au – 1/06/2020. Based on variable owner occupier loans available for a loan amount of $400,000, 80% LVR and principal & interest repayments. Table sorted in ascending order by rate, followed by comparison rate, followed by alphabetically by lender.  Comparison rates calculated based on a $150,000 loan amount over a total loan term of 25 years.

Cheapest loans if you have a 30% deposit

The biggest savings go to borrowers with a 30% deposit. On that same $500,000 property, this would require a deposit of $150,000 and a home loan for $350,000. At this level of deposit, you’d pay zero LMI, and a rate as low as 2.29% (comparison rate 2.32%) with Reduce Home Loans. This could see your monthly repayments plunge to $1,533, and take the long-term interest cost down to $110,020, a saving of $38,161 compared to having a 10% deposit.

Top 4 Lowest Rate Owner Occupier Variable Home Loans with a 30% Deposit
Lender Product Rate Comparison Rate
Reduce Home Loans Low Rider Variable 70% 2.29% 2.32%
Homestar Finance Star Essentials 80% OO 150-850k 2.39% 2.39%
Pacific Mortgage Group Variable P&I 2.39% 2.39%
TicToc Home Loans Live-in Variable P&I 2.39% 2.40%
Source: www.canstar.com.au – 1/06/2020. Based on variable owner occupier loans available for a loan amount of $400,000, 70% LVR and principal & interest repayments. Table sorted in ascending order by rate, followed by comparison rate, followed by alphabetically by lender.  Comparison rates calculated based on a $150,000 loan amount over a total loan term of 25 years.

Of course, the interest rate isn’t the only thing to consider. It always makes sense to look for the loan that has the right features for your needs. But, with all these savings up for grabs, it’s easy to see why it can be worth taking the time to grow your deposit.

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What about the First Home Loan Deposit Scheme?

The news that a bigger deposit can mean a lower rate poses something of a conundrum for first home buyers. That’s because the new First Home Loan Deposit Scheme (FHLDS) is pitched at first home owners who have only a 5% deposit. The appeal of the scheme is that the federal government will guarantee the loan at no cost, so it provides valuable savings on the cost of LMI.

Fortunately, first home buyers can still secure a low rate even with just a 5% deposit. Among the lenders that have signed up to the FHLDS, the lowest rates available are through Police Bank (2.79%, comparison rate 2.87%) and Endeavour Mutual/Sydney Mutual (2.87%, comparison rate 2.90%). These rates are a little higher than if you have a larger deposit, though they still represent a good deal.

Top 3 Lowest Rate Variable Loans Available with a 5% Deposit from Lenders Under the First Home Loan Deposit Scheme
Lender Product Rate Comparison Rate
Police Bank First Home Loan 2.79% 2.87%
Endeavour Mutual Bank
Sydney Mutual Bank
First Home Buyer Loan Basic Variable 2.87% 2.90%
P&N Bank Simple Home Loan 2.92% 2.92%
Source: www.canstar.com.au – 1/06/2020. Based on variable owner occupier loans available for a loan amount of $400,000, 95% LVR and principal & interest repayments. This is not a complete list of products available under the Scheme, check with your lender. Table sorted in ascending order by rate.

For first home buyers who may have been stood down during COVID-19, Ms Mitchell said that some lenders will accept JobKeeper payments as income as part of a mortgage application. “This really is a positive for applicants who are certain they will return to work at some point, and who have saved their deposit and are ready to buy,” she explained.

What if you don’t have a large deposit?

If you’re struggling to scrape together a large deposit a number of lenders are offering some tempting enticements especially for refinancers.

Suncorp Bank has launched a home loan refinance cashback offer of up to $4,000 for health, education and emergency services workers. This comes on the back of a market-wide cashback of up to $3,000 for home owners who refinance their loan with Suncorp. You’ll need at least a 10% deposit. Other lenders offering a cashback to refinancers include Commonwealth Bank ($2,000) and MOVE Bank ($1,000).

The key is not to let a cashback shape your loan decision. Always check that you’re getting the features you need backed by a competitive rate. After all, the cash will soon be gone – but your home loan is likely to be with you for some time.


Nicola FieldAbout Nicola Field

Nicola Field is a personal finance writer with nearly two decades of industry experience. A former chartered accountant with a Master of Education degree, Nicola has contributed to several popular magazines including the Australian Women’s Weekly, Money and Real Living. She has authored several best-selling family-focused finance books including Baby or Bust (Wiley) and Investing in Your Child’s Future (Wiley).

 

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