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It may be difficult, but saving for a large deposit on your home loan will benefit you in the long run.

It may be difficult, but saving for a large deposit on your home loan will benefit you in the long run.

Some borrowers may rush in and apply for a home loan after only saving the bare minimum and then be faced with other costs.

According to RateCity, the decline in interest rates has caused loan repayment amounts to decrease, however it has also resulted in an increase in housing prices. So, for many people, the beginning is now the hardest part as they have to put down a larger deposit and may opt to borrow more money instead of saving for a deposit.

When lenders evaluate your suitability for a home loan, they use the Loan to Value Ratio (LVR). This is a percentage that determines how much you can borrow compared to the value of the house. Different loans have different LVRs and there are risks with both higher and lower LVRs. Therefore it is important to do your research and compare different loans.

The Loan to Value Ratio also determines if you need to pay for Lender’s Mortgage Insurance (LMI). This insurance protects the lender should you default on your repayments. Some lenders insure all their loans and others only insure the loans with a loan to value ratio above 80%. If the LVR is above 80%, most lenders will charge you for Lender’s Mortgage Insurance, but if it is below 80% you may not be charged. The LMI goes up radically after exceeding 80%, so you may be facing quite a large bill if you haven’t saved a sufficient amount for the deposit.

Every lender has different LVR’s and the best way to calculate how much you need to save for a deposit is to compare loans. We at State Custodians lists the LVR on each of our home loans so you can work out the amount you should save for a deposit.

Saving for a large deposit will also show the lender that you are capable of working towards a financial goal and this will be a major advantage when applying for a home loan.