Loan to Value Ratio (LVR)
The Loan to Value Ratio is a way of showing how much equity you have in a property by comparing the amount of your deposit to the amount your lender is offering toward the mortgage.
As an example, if you purchase a property for $300,000 with a $60,000 deposit, then you will have a $240,000 mortgage. This gives you a ratio of 80 per cent, as $240,000 is 80 per cent of the total home value.
Lenders mortgage insurance
Deposits of less than 20 per cent of the total home value will usually require you to take out lenders mortgage insurance.
Most lenders will require a 20 per cent deposit on your home as a minimum. However, if you do not have this figure but still want to apply for a loan, insurance can help you to borrow up to 95 per cent of the purchase price of the home.
This gives the lender an assurance that they will not lose their investment.
Lenders mortgage insurance will come at a cost to you as a borrower however.
A deposit bond is another term you will need to know when you are looking to apply for a loan.
This bond is something that you give to the seller of the property instead of a cash deposit.
Usually, a deposit bond is worth ten per cent of the purchase price and is offered to the vendor in advance of the final settlement of the sale.
The benefit for you is that a bond allows you to keep your cash or assets in reserve until you are closer to the final date of settlement. Therefore no money passes hands until the time of the sale.
The seller will benefit as they are guaranteed the cash deposit closer to the time by a contractual agreement.
Your lender secures the bond, and you pay a fee to the lender for their services based on the value of the bond and the time until final settlement.
If you don’t have a deposit
Applying for a loan without a deposit is rare but not impossible.
If you find a home that simply can not wait for you to save a deposit, you may be able to use a guarantee from your parents or other family members to assist you using their property.
This is known as a family guarantee.