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What is a Home Loan Deposit?

Nicole Madison
Nicole Madison
Nicole Madison
Nicole Madison

A home loan deposit is an amount of money a mortgage borrower pays to a lender at the outset of a loan. The deposit provides the lender with security; in the event the borrower defaults, the lender keeps the deposit amount as compensation. It also ensures that the borrower has some equity, or ownership, in the home from the outset of the loan. From the viewpoint of the lender, this may make an individual less likely to default on the mortgage.

The amount of money a person must have for a home loan deposit depends on a number of factors, including the home’s purchase price, the lender, the borrower’s credit rating, and the borrower’s willingness to pay private mortgage insurance. In the past, many mortgage lenders required borrowers to pay home loan deposits that amounted to at least 20 percent of a home’s purchase price. Over time, however, lenders became more flexible with home loan deposits. They began to accept 10 percent, five percent, and sometimes even less for a home loan deposit.

Home loan deposits are required when using a mortgage to buy residential property.
Home loan deposits are required when using a mortgage to buy residential property.

In general, lower deposits require a borrower to pay more interest. For example, a person who makes a 20-percent home loam deposit is likely to enjoy a lower interest rate than a person who makes a five-percent down payment. An individual’s credit rating, however, may also play a role in the amount of interest he has to pay. Those with lower credit scores usually face higher interest rates.

A home's purchase price affects the amount of money required for a home loan deposit.
A home's purchase price affects the amount of money required for a home loan deposit.

Making a higher home loan deposit often translates into overall savings in housing-related costs for a borrower. In most cases, a borrower who makes a home loan deposit of at least 20 percent is not required to pay private mortgage insurance. Private mortgage insurance is an insurance coverage a borrower buys for the benefit of the lender. In the event that the borrower defaults on his loan, the insurance company pays the lender. Many lenders are unwilling to grant a home loan with less than a 20-percent home loan deposit unless the borrower agrees to pay for private mortgage insurance.

Saving money for a home loan deposit will save most people thousands of dollars over a no deposit home loan.
Saving money for a home loan deposit will save most people thousands of dollars over a no deposit home loan.

In some jurisdictions, a person who has limited money for a home loan deposit may take advantage of government programs that provide assistance for those with limited money available for down payments. Often, such a program insures loans given to eligible borrowers. This means lenders can grant these borrowers loans with lower deposits yet take on less lending risk.

Nicole Madison
Nicole Madison

Nicole’s thirst for knowledge inspired her to become a WiseGEEK writer, and she focuses primarily on topics such as homeschooling, parenting, health, science, and business. When not writing or spending time with her four children, Nicole enjoys reading, camping, and going to the beach.

Learn more...
Nicole Madison
Nicole Madison

Nicole’s thirst for knowledge inspired her to become a WiseGEEK writer, and she focuses primarily on topics such as homeschooling, parenting, health, science, and business. When not writing or spending time with her four children, Nicole enjoys reading, camping, and going to the beach.

Learn more...

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    • Home loan deposits are required when using a mortgage to buy residential property.
      By: Alterfalter
      Home loan deposits are required when using a mortgage to buy residential property.
    • A home's purchase price affects the amount of money required for a home loan deposit.
      By: Andres Rodriguez
      A home's purchase price affects the amount of money required for a home loan deposit.
    • Saving money for a home loan deposit will save most people thousands of dollars over a no deposit home loan.
      By: Kurhan
      Saving money for a home loan deposit will save most people thousands of dollars over a no deposit home loan.
    • Down payment and credit worthiness often determine the terms of a home loan.
      By: Elenathewise
      Down payment and credit worthiness often determine the terms of a home loan.