Saving for a home deposit is one of the biggest financial steps when preparing to buy property. But the amount you contribute does more than determine how much you need to borrow. It can also affect your loan-to-value ratio (LVR), whether lenders mortgage insurance (LMI) applies and the lending options available to you.
If you’re researching how much deposit you need, understanding LVR and LMI can help you plan your purchase more effectively. A smaller deposit may allow you to enter the property market sooner, but it can also mean borrowing a larger proportion of the property’s value and potentially paying additional costs.
In this guide, MorFin Group explains what LVR and LMI mean, how they are calculated and how different deposit amounts can influence your home loan.
What is LVR in a home loan?
LVR stands for loan-to-value ratio. It represents the amount you’re borrowing as a percentage of the property’s value.
Lenders use LVR as one of the factors when assessing a home loan application. Generally, a lower LVR means you’re contributing more towards the purchase and borrowing a smaller proportion of the property’s value.
The formula is:
LVR = (Loan amount ÷ Property value) × 100
For example, imagine you’re purchasing a property valued at $800,000 and borrowing $640,000.
Your LVR would be:
$640,000 ÷ $800,000 × 100 = 80% LVR
This means you’re borrowing 80% of the property’s value and contributing the remaining 20% through your deposit, excluding other purchasing costs.
It’s worth noting that lenders may use their own property valuation rather than the purchase price when calculating LVR. If the lender’s valuation is lower than the agreed purchase price, your required contribution could increase.
How your deposit affects your LVR
Your deposit and LVR are closely connected. A larger deposit generally means a smaller loan and a lower LVR, while a smaller deposit means you’ll need to borrow a greater proportion of the property’s value.
Consider the following example for a property worth $800,000:
| Deposit | Deposit amount | Loan amount | LVR |
|---|---|---|---|
| 5% | $40,000 | $760,000 | 95% |
| 10% | $80,000 | $720,000 | 90% |
| 15% | $120,000 | $680,000 | 85% |
| 20% | $160,000 | $640,000 | 80% |
As the table shows, increasing your deposit reduces the amount you need to borrow and lowers your LVR. This can influence the loan products available to you, the lender’s assessment and whether LMI is required.
What is LMI and why do lenders charge it?
Lenders mortgage insurance, commonly known as LMI, is an insurance policy that protects the lender if a borrower defaults on their home loan and the sale of the property does not recover the outstanding debt and associated costs.
LMI is commonly required when a borrower has an LVR above 80%, although lender policies, exemptions and individual circumstances can vary.
One important point is that LMI protects the lender, not the borrower. Even if you pay the LMI premium, it does not remove your responsibility to repay the mortgage or cover any outstanding shortfall if the property is sold for less than the amount owed.
LMI is generally a one-off premium. Depending on the lender’s arrangements, it may be paid upfront at settlement or added to the loan. If it is capitalised into your mortgage, you’ll also pay interest on that additional amount.
Why does LMI apply to smaller deposits?
When you contribute a smaller deposit, the lender is financing a larger percentage of the property’s value. This generally represents a higher lending risk because there is a smaller equity buffer if property values fall or the borrower cannot meet repayments.
LMI provides the lender with insurance protection against certain losses associated with that risk. It can also allow lenders to offer home loans to eligible borrowers who have less than a 20% deposit.
However, paying LMI does not guarantee loan approval. Lenders still assess your income, expenses, existing debts, credit history and ability to manage repayments.
How much deposit do you need to avoid LMI?
A 20% deposit is a common target for Australian home buyers because it generally results in an LVR of 80%, which may help avoid LMI.
Using the earlier $800,000 property example:
- 5% deposit: $40,000, resulting in a 95% LVR.
- 10% deposit: $80,000, resulting in a 90% LVR.
- 15% deposit: $120,000, resulting in an 85% LVR.
- 20% deposit: $160,000, resulting in an 80% LVR.
However, a 20% deposit is not always essential to purchase a property. Some lenders accept smaller deposits, subject to their lending policies and the borrower’s financial position. Eligible buyers may also be able to access government support programs that help them purchase with a smaller deposit without paying LMI.
Can you buy a property with a 5% deposit?
Yes, it may be possible, depending on your eligibility and the lender’s requirements.
The Australian Government 5% Deposit Scheme allows eligible first-home buyers to purchase a home with a minimum 5% deposit without paying LMI. Eligible single parents and legal guardians may be able to purchase with a minimum 2% deposit.
The scheme operates through participating lenders and has eligibility requirements, including property price limits and other conditions. Meeting the minimum deposit requirement alone does not guarantee approval.
If you’re considering this option, check the current eligibility requirements and participating lender arrangements before making a purchase decision.
How much does LMI cost?
There is no single fixed price for LMI. The premium depends on several factors, including:
- The amount you’re borrowing.
- Your LVR.
- The property’s value.
- The lender’s LMI arrangements.
- The type and circumstances of the loan.
Generally, a higher LVR and larger loan amount can result in a higher LMI premium.
For example, two buyers purchasing properties at the same price may pay different LMI premiums if they contribute different deposit amounts.
Because LMI costs can vary significantly, it’s important to obtain an estimate based on your proposed loan amount and circumstances rather than relying on a general online figure.
You should also consider whether the premium will be paid upfront or added to the mortgage, as capitalising LMI increases the total loan balance and interest payable.
Is paying LMI worth it?
Whether paying LMI makes sense depends on your financial position, property plans and the alternatives available to you.
For some buyers, paying LMI may allow them to purchase a suitable property sooner instead of spending additional years saving for a larger deposit. For others, waiting and building a bigger deposit may reduce borrowing costs and improve their lending position.
Consider these factors before deciding:
1. The cost of waiting
Property prices, rent and your personal circumstances may change while you’re saving. Waiting could give you more time to build a deposit, but it doesn’t automatically mean the property will become more affordable.
2. The cost of LMI
Calculate the estimated premium and consider how it affects your upfront costs or overall loan balance if added to the mortgage.
3. Your ongoing repayments
A smaller deposit means a larger loan. Consider whether the repayments remain manageable alongside your regular living expenses and other financial commitments.
4. Your available alternatives
You may qualify for a government deposit scheme, a lender-specific LMI arrangement or a family guarantee option. Each has its own conditions and risks.
The objective should not simply be to avoid LMI. It should be to understand the total cost of purchasing and choose a loan structure that is suitable for your circumstances.
What lenders consider beyond your deposit
Your deposit and LVR are important, but they are not the only factors lenders consider when reviewing a home loan application.
They may also assess:
- Income and employment: Your regular income, employment type and financial stability.
- Living expenses: Your household spending and ongoing financial commitments.
- Existing debts: Credit cards, personal loans, car finance and other liabilities.
- Credit history: Your repayment history and credit report information.
- Property valuation: Whether the property provides acceptable security for the proposed loan.
- Loan serviceability: Whether you can manage repayments under the lender’s assessment requirements.
Lenders also apply serviceability assessments that account for potential interest rate increases. APRA currently requires authorised deposit-taking institutions to apply a mortgage serviceability buffer of at least three percentage points above the loan interest rate when assessing borrowers’ ability to service new home loans.
This means having a larger deposit does not automatically guarantee approval. Your overall financial position still matters.
How MorFin Group can help you understand your deposit options
Working out how much deposit you need involves more than calculating a percentage of the property price. You also need to consider LVR, potential LMI costs, purchasing expenses, borrowing capacity and the lending criteria of different institutions.
MorFin Group helps home buyers explore mortgage options based on their financial circumstances and property goals.
With access to more than 25 banks and lending institutions, we can help you understand how different deposit amounts may affect your borrowing requirements, compare relevant loan structures and identify potential options worth exploring.
Whether you’re aiming for a 20% deposit or considering purchasing with a smaller contribution, understanding the numbers before committing can help you make a more informed decision.
Contact MorFin Group to discuss your home loan options.
Phone: 02 8000 4810
Email: [email protected]
Conclusion
Your deposit can have a significant impact on your home loan, influencing your LVR, potential LMI costs and the amount you need to borrow. While a 20% deposit may help you avoid LMI in many cases, it isn’t the only way to enter the Australian property market.
Understanding the available options, comparing lending requirements and assessing your repayment capacity can help you decide what deposit target makes sense for your circumstances. Before committing to a property purchase, consider the full cost of borrowing rather than focusing on the deposit alone.
If you’re unsure how your deposit could affect your borrowing options, MorFin Group can help you explore suitable lending pathways and understand the costs involved.
Frequently asked questions
Q1. What is LVR in simple terms?
LVR, or loan-to-value ratio, is the percentage of a property’s value that you’re borrowing from a lender. For example, if you borrow $400,000 against a property valued at $500,000, your LVR is 80%.
Q2. What is LMI and who does it protect?
LMI stands for lenders mortgage insurance. It protects the lender if a borrower defaults and the property sale does not recover the outstanding debt and associated costs. It does not protect the borrower.
Q3. Do I need a 20% deposit to buy a house in Australia?
No. Some lenders accept deposits below 20%, subject to their lending criteria. Eligible buyers may also access government support schemes that allow them to purchase with a smaller deposit without paying LMI.
Q4. Can I avoid LMI with a 10% deposit?
Possibly, but it depends on the lender and your circumstances. Some borrowers may qualify for an LMI waiver, government guarantee scheme or other lending arrangement. A 10% deposit does not automatically mean LMI will be waived.
Q5. Can LMI be added to my home loan?
Some lenders allow the LMI premium to be added to the loan rather than paid upfront. This increases your total loan balance and means you may pay interest on the premium.
Q6. Does a higher deposit improve my chances of loan approval?
A larger deposit generally reduces your LVR and the amount you need to borrow. However, lenders also assess income, expenses, existing debts, credit history, property suitability and loan serviceability.
Q7. Is LMI refundable if I refinance?
Generally, LMI is not automatically refunded when you refinance. Any potential refund depends on the insurer’s policy, the timing and circumstances of repayment, and the applicable terms. You should check with the relevant lender or insurer before refinancing.
Q8. Does LMI mean I am covered if I cannot repay my mortgage?
No. LMI protects the lender, not the borrower. You remain responsible for meeting your mortgage obligations, even if an LMI policy applies to the loan.