How a bigger deposit changes a home loan

Resources · Home loans and saving · 4 min read Building

Key points

• A bigger deposit means a smaller loan, lower repayments and less total interest.
• It can also lower your loan-to-value ratio, which may affect the rate and extra costs.
• Saving a bigger deposit takes time, and prices and plans can change while you wait.
• Using every dollar for the deposit can leave no buffer for costs and emergencies.

What a bigger home loan deposit does

Put down a bigger home loan deposit and you borrow less. Simple as that. Your repayments drop, you pay less interest over the life of the loan, and some lending costs can shrink too.

The catch is time. A bigger deposit usually takes longer to save. (In some countries it’s called a down payment. Same idea.)

A worked example

Assumptions:

• Home price: $500,000
• Rate: 6% a year, charged monthly, for both loans
• Term: 30 years
• Rates never change
• Purchase costs and fees are left out to keep it simple

The same maths works in any currency.

The bigger deposit cuts the repayment by $299.77 a month. Over 30 years it saves $57,922.13 in interest.

That’s more than the extra $50,000 itself. Why? Because every dollar you don’t borrow avoids interest for the whole term.

Loan-to-value ratio and why it matters

Lenders often look at your loan-to-value ratio, or LVR. Some countries call it LTV. It’s just the loan divided by the property’s value.

In the example above, the 10% deposit gives an LVR of 90%. The 20% deposit gives 80%.

That lower ratio can matter. In some countries, borrowers with a smaller deposit may have to pay for mortgage insurance, which protects the lender, not you. The thresholds, names and costs vary, but it can add a large one-off or ongoing cost.

Rates can come into it too. Some loans offer lower rates when the ratio is lower, and even a small rate difference adds up over decades. A bigger deposit may also open up more loan types to choose from.

The trade-off: waiting to save more

Saving more takes time. Say you save $1,500 a month in an account earning 4% a year, compounded monthly. Saving the extra $50,000 that way would take about 32 months, almost three years. (If the $50,000 you already have earns the same 4%, it’s about 29 months.)

A lot can change in three years.

Home prices can rise or fall, and if they rise faster than you save, the gap grows. You keep paying rent the whole time. That’s money you’d otherwise put toward your own place, although owning has its own costs too. Interest rates may move either way. And life moves. Jobs, families and plans all change.

Some people buy sooner with a smaller deposit and accept the higher costs. Others wait for a bigger deposit and lower repayments. Neither is wrong. It comes down to your local market, your rent, how secure your job feels, and which risk you’re more comfortable carrying.

Don’t forget the other costs

The deposit isn’t the only cash you’ll need. Buying a home usually comes with other upfront costs, and they vary by country. Tick these off as you plan:

• Government charges or transfer taxes on the purchase
• Legal or settlement fees
• Inspections and valuations
• Loan setup fees
• Moving costs and early repairs

Pour every dollar into the deposit and you can end up short for these. Or you move in with no emergency fund at all. That’s why some people deliberately keep a buffer back. Our guide to saving for a big purchase covers planning for several costs at once.

Other debts and your deposit

Carrying credit card or personal loan debt? In many countries those repayments reduce how much you can borrow. They also keep costing you interest while you save. Some people clear them before saving a deposit. Others do both at once. Our guide to debt-to-income ratio explains how lenders often view existing debts.

Common questions

How much deposit do you need for a home loan?

It varies by country, lender and loan type. A smaller deposit is often possible, but it may come with mortgage insurance or a higher rate. A bigger deposit means a smaller loan and less total interest.

Is it better to save a bigger deposit or buy sooner?

There’s no single answer. A bigger deposit lowers your repayments and interest. But saving takes time, and prices, rent and rates can all move while you wait.

Does a bigger deposit get you a lower interest rate?

Sometimes. Some loans price their rates by loan-to-value ratio, so a bigger deposit may qualify for a lower rate. Not always, though.

Try it

The loan repayment calculator shows how different loan amounts change your repayment and total interest. And the savings goal calculator shows how long a bigger deposit could take to save.

General information only, not financial advice. Your situation is your own.