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The pros and cons of paying a 40% deposit on your home loan

Collage of a woman thinking about a 40% home loan deposit

Paying at least 20% of the purchase price upfront is standard when taking out a home loan. This portion establishes the loan-to-value ratio (LVR) for the mortgage and the interest rate the borrower is eligible for. 

Australians often need six-figure savings to afford this standard 20% deposit, so it’s understandable that many would try to buy with a smaller one. But what happens if you take out a home loan with a larger deposit?

Believe it or not, many home loan offers are available in the Mozo database for borrowers with up to 40% deposit (or 60% LVR).

These products usually come with lower home loan interest rates than standard 80% LVR mortgages, saving borrowers money on their mortgage repayments. But are the trade-offs of a large deposit home loan worth it?

Let’s look at the pros and cons of making a 40% down payment on a home loan.

Pros and cons of buying property with a 40% home loan deposit.

Pro: the interest rate is lower

Woman thinking about a low interest rate on her home loan

The main advantage of having a bigger deposit for a home loan is that you are eligible for a lower interest rate. 

Mortgages with at least 60% LVR often come with the most competitive interest rates because they are less risky to the lender. The owner has more home equity and may be in a better financial position, making them unlikely to miss or default on their mortgage repayments

Looking at home loan interest rates for different LVR tiers, we can see that, on average, loans with 60% LVRs get better rates than higher ones in the Mozo database. 

LVR
Average interest rate
60%
6.77%
70%
6.81%
80%
6.85%
90%
7.13%
95%
7.38%

Admittedly, the value difference between the 80%, 70%, and 60% LVR tiers in the Mozo database isn’t dramatic. Depending on the situation, it may be prudent to opt for an 80% tier instead. 

However, according to Mozo’s mortgage repayment calculator, the difference between a 60% and 95% LVR interest rate for the same home loan with $400,000 left in principal on a 25-year term amounts to $156 saved per month and $46,815 saved over the life of the loan – plus whatever the borrower doesn’t have to pay in Lenders Mortgage Insurance.

Con: it can be harder to save for a 40% deposit

Thumbs down for how hard it is to save for a home loan deposit

Average mortgage sizes in Australia – especially in the capital cities – can easily exceed the saving ability of average Aussies. In fact, even saving for a 20% deposit can mean putting away nearly two and a half times the average salary of someone living in NSW. 

If the goal is doubled, saving for a deposit can be that much harder. However, there are ways to stretch your savings and expand your home-buying budget, namely by: 

These strategies may help increase the size of the deposit you can front up for a mortgage.

Pro: it cuts down the loan amount you have to repay

Woman thinking about the small size of her home loan

Having a larger deposit can also cut down on the size of the loan amount you need to repay. The same sum of money could be a 20% deposit in one place or a 40% deposit in another, eating away at the principal left and lowering the costs of principal and interest repayments. 

For example, let’s say Rachel has saved $200,000 for a deposit – not including stamp duty or other associated home loan costs and fees. This same $200,000 could either become a 20% deposit for a $1 million property or a 40% deposit for a $500,000 property. 

By choosing to buy the cheaper property, not only would Rachel repay a lower interest rate but also a lower principal. If she decides to take a loan term of 25 years, this is a staggering $3,503 saved per month.

Deposit
Property price
Principal
Interest rate
Monthly P&I repayments
20%
$1 million
$800,000
6.85%
$5,578
40%
$500,000
$300,000
6.77%
$2,077

The money she saves on repayments could be put towards an offset account or extra repayments, cutting down her home loan costs and the time it takes to fully pay off her mortgage

Con: you may have less choice of properties

Man exhausted with how expensive property is in Australia

Granted, as lovely as it would be to just pay a 40% deposit for a $500,000 home, properties under this price mark can be a little trickier to find in Australia, depending on the location. 

Popular capital cities like Sydney and Melbourne have few suburbs where it’s possible to grab a home for this value, but other capitals like Adelaide, Darwin, and Brisbane will have more available. Regional towns and cities will have even more choices, so depending on where you’re keen to buy, you could be looking for a needle in a haystack or your favourite place of many. 

Remember: rentvesting is always an option. Looking further afield may just be the compromise you must make to get on the property ladder. Every journey is different because every homebuyer is different – what makes the most sense must make sense for you. 

Compare home loans in the table below.

Compare home loans - last updated 19 April 2024

Search promoted home loans below or do a full Mozo database search. Advertiser disclosure
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    Express Home Loan

    Owner Occupier, Principal & Interest, LVR <90%

    interest rate
    comparison rate
    Initial monthly repayment
    6.01% p.a. variable
    6.14% p.a.

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    Fixed, Owner Occupier, Principal & Interest, LVR <60%

    interest rate
    comparison rate
    Initial monthly repayment
    5.99% p.a.
    fixed 3 years
    6.37% p.a.

    Competitive Fixed rate. Multiple offset accounts available. Borrowers can also make extra repayments. Redraw facility available. Simple online application process. 40% deposit required.

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  • Discounted Home Value Loan

    Owner Occupier, Principal & Interest, LVR 70-80%

    interest rate
    comparison rate
    Initial monthly repayment
    6.09% p.a. variable
    6.09% p.a.

    Enjoy competitive rates for owner occupiers. Enjoy unlimited free extra repayments. Flexibility to redraw additional payments for free. No ongoing monthly service fee. Settlement fee waived on new borrowings from $50,000 (T&Cs apply).

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    Owner Occupier, Principal & Interest, LVR <60%

    interest rate
    comparison rate
    Initial monthly repayment
    6.14% p.a. variable
    6.16% p.a.

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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. You can change the loan amount and term in the input boxes at the top of this table. 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

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.

Evlin DuBose
Evlin DuBose
RG146
Senior Money Writer

Evlin is RG146 certified for Generic Knowledge and has become a leading voice in finance news since joining Mozo two years ago. She is regularly featured in Google's Top Stories alongside major publications like News.com.au and Yahoo Finance, and seasoned journalists. Despite being in the industry for just two years, she is Mozo's go-to writer for all things RBA and her research has been referenced by the Victorian Government. With a Bachelor of Communications degree from UTS, where she won the Dean's Merit Award and acted as the Director of Student Publications.

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