Can a larger home loan deposit help you save money?


For many of us, savings for a home deposit is no easy feat. In fact, it can take a number of years of putting away money and budgeting to get there. 

The truth is, you can take out a home loan with a deposit of as little as 5%. However, it generally comes with extra costs and could end up leaving you more out of pocket over the life of the loan. 

That’s why saving up more for a deposit of 20% of the property value (or more) is actually more likely to save you money in the long run. 

Here’s how: 

Simply put, the more you save as a home deposit the less you will have to borrow to buy a property. It ultimately reduces the percentage of the property value you pay interest on. 

For home loan customers with a 20% deposit, or 80% Loan to Value Ratio (LVR), lenders won’t charge Lenders Mortgage Insurance (LMI) and may offer more competitive interest rates. 

Plus, the more money you have in your back pocket for a deposit, the easier it is to prove that you have the necessary savings. That way when it comes time to be approved for a loan, you have more chance of being given the green light. 

What's a Loan to Value Ratio again? 

Your Loan to Value Ratio (LVR) refers to the amount you are borrowing from the bank in relation to the value of the property you intend to buy. So, it’s the value of the property minus the deposit you’ve saved.  

Take this for example. Say you saved up a 20% deposit, you would need to borrow 80% of the property value from the bank. Therefore, your LVR would be 80%.  

Similarly, if you had a smaller 10% deposit, your LVR would be 90% or if you had a larger 30% deposit your LVR would be 70%. 

Ultimately, the larger your deposit on a particular property, the lower your LVR.  So when you are figuring out how much you can borrow aim for having low LVRs.

So what are the benefits of a lower LVR? 

As mentioned above, there are two main benefits of having an 80% LVR or less: no LMI) and lower interest rates

LMI is a type of insurance that lenders take out in order to protect themselves in case a borrower with a small deposit (under 20%) defaults on their loan. This insurance is not designed to cover the borrower, however it is the borrower who is charged for this cost. It often adds up to around 2% of the value of the loan - so the bigger the loan the more you pay in LMI. 

However, for borrowers who have a deposit of 20% of more, you are not required to pay LMI as you are viewed as a less risky borrower. So if you took out a $600,000 loan with a 20% deposit, you could end up saving around $12,000 in LMI costs. 

And what about lower interest rates? Well, a bunch of lenders offer more competitive rates to borrowers who have a 80% LVR or lower. Over the life of a 30-year home loan, a lower rate could end up saving you thousands of dollars in interest repayments. 

How to save for a home deposit

Already have a deposit saved up and want to start comparing mortgage options? Check out some hot deals below or jump over to our home loans hub for more!

Compare Home Loans - last updated 7 July 2022

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    $5000 refinance cashback. Owner-occupier refinancers only living in NSW/VIC/SA metro and inner regional areas. Receive up to an additional 0.15% off your rate as you pay off the loan. Receive bonus payments up to $2,500. T&Cs apply. Mozo Experts Choice Award winner for 2022^.

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

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