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The benefits of having a larger deposit
Saving a large deposit means smaller interest repayments, no lenders mortgage insurance costs and easier home loan approval.
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A 20% deposit is considered the standard size in Australia. This lets you avoid paying lenders mortgage insurance (LMI). But you could save a deposit above 20%. While most people can't afford to do this, with house prices so high, it is possible and has some advantages. The bigger your deposit the less you have to borrow. And this means you pay less interest.
The benefits of saving a larger mortgage deposit
The biggest benefit of having a deposit above 20% is that you borrow less money. If you can save up a 30% deposit, for example, that’s 30% of the purchase price of a property you can pay off straight away. That means that you borrow less from the bank and pay a whole lot less interest over the life of the loan, which is a big win in anyone’s language.
Here's a simple calculation:
- Property price: $700,000
- 20% deposit: $140,000
- Loan amount: $560,000
But with a 30% deposit that changes:
- Property price: $700,000
- 30% deposit: $210,000
- Loan amount: $490,000
Assuming a 30-year loan term and an interest rate of 2.00%, your monthly repayments are quite different in these scenarios:
- Monthly repayments with a 20% deposit = $2,069
- Monthly repayments with a 30% deposit = $1,811
Having a larger deposit in this case saves you $258 a month or $3,096 a year.
5 more reasons saving a bigger deposit helps
- No LMI costs. You’ll most likely need to cover the cost of lenders mortgage insurance if you have less than a 20% deposit saved and need to borrow more than 80% of the purchase price. As a general rule, LMI costs around 2% of the value of the loan. This is an extra expense you’ll need to factor into your calculations when budgeting for a loan, so saving a larger deposit will allow you to avoid this additional cost.
- Proof of savings. When you apply for a loan, a lender will usually ask for evidence of a regular savings history over 3 months or more. Known as genuine savings, this usually takes the form of a bank statement showing your regular contributions into a savings account. And if you have a deposit of 30% or more saved, you’ll be able to provide excellent evidence of your savings ability and make your application more attractive in the eyes of a lender.
- Increase your chance of approval. Lenders regard low deposit borrowers as higher risk. Having a big deposit makes you a safer bet and that increases your chances of getting your home loan application approved.
- Increase your borrowing power. The more money you have saved, the less risk you represent to a lender. If your bank is confident you’ll be able to comfortably service your loan, your borrowing capacity will increase and you may be able to borrow more.
- Access special rates and deals. A larger deposit and a lower LVR mean that you may be able to qualify for special loan and interest rate deals that save you even more money. For example, the Mortgage House 50% LVR special is offered to borrowers who have a minimum 50% deposit saved, and it includes flexible features such as the ability to make unlimited extra repayments and a 100% offset account to minimise interest.
Tips to actually save a larger deposit
- Develop a savings plan. Developing a realistic savings plan is a great way to start saving for a deposit. Work out how much money you need to save and then work out a budget. Work out how much money you can afford to put away each week and start building your balance.
- Make regular deposits. Set up a regular direct debit straight from your income into your savings account. This way, you’ll be saving money without realising it, but you can always add in extra lump sums if circumstances allow.
- Consider a high interest savings account. Shop around for an online savings account that offers a great interest rate and minimal or no fees. You may also want to consider a term deposit so that your savings can earn a higher rate of interest.
- Cut back on expenses. If you work out a weekly budget, you should be able to find a few areas where you can cut back on expenses. Do you really need that gym membership you never use? Could you eat at home rather than dine out one night extra per week? You’d be surprised how much you can save once you put your mind to it.
- FHOG. If you’re saving for your first home, remember that states and territories around Australia offer a range of grants and concessions to first-time buyers. The First Home Owners Grant (FHOG) offers useful financial support to many first home buyers, so check to see if you’re eligible.
Check out our full guide to saving a house deposit
How to determine your deposit size
You should have a rough idea of the deposit you need to save. You can determine this by looking at how much you have already saved, how much you can realistically save before you buy and the rough price range of properties you are looking at.
You can also just work out your budget for a property and work backwards. Let's say you are willing to buy a property worth $650,000. Then a 20% deposit will be $130,000.
Understand home loan LVRs
In the fine print explaining the features of mortgage products, you may have seen the words "maximum LVR" followed by a percentage. LVR stands for loan-to-value ratio, which is a figure that expresses the amount of money you are allowed to borrow on the loan relative to the purchase price of the property.
If you see a loan with an LVR of 80% that means you can borrow 80% of the property's value. In other words, you must have a 20% deposit.
Many Australian lenders offer loans with a maximum LVR of up to 90% or 95%, which means you would need to have a 10% or 5% deposit saved respectively. However, you would also need to budget for a number of other fees that apply when you buy a home, including conveyancing fees, stamp duty and home loan application fees.
For more information about deposit size and what works for you, check out this page on deposit sizes.
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Ask an Expert
I want to buy my sister’s half of a inherited house witch is morgage free what is the best way.
Hi Terry,
I’m not sure if you want some guidance around getting a loan, or the legal/logistics of transferring the property ownership?
If you need to buy out your sister’s portion of the house with a home loan, you can compare the latest home loan offers.
If you’re asking about the legal/official transfer of title, this is a fairly straightforward process but there area a number of steps involved, so it could be worth working with a professional. A conveyancer or lawyer can help you file all of the correct and necessary paperwork to facilitate the legal transfer, at a cost of around $500-700.
Hope this helps!
Many thanks
Sarah