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

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.

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. 

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.

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: 

• Buying with a guarantor. 
• Applying for government homeownership grants, like the NSW shared equity scheme.

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

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.

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. 

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.