How Your Deposit Size Affects the Home Loan Interest Rate You Get

Understanding the Connection Between Deposit Size and Interest Rates

When applying for a home loan, many borrowers focus on credit scores, income, and lender options. But one of the most important factors influencing the interest rate you receive is your deposit size.

A larger deposit reduces the lender’s risk, which often leads to lower interest rates, better loan terms, and fewer fees. In contrast, a smaller deposit can result in higher rates, additional costs like Lenders Mortgage Insurance (LMI), and tighter borrowing conditions.

The key questions many borrowers ask: How much deposit do I need for a better rate? And should I wait to save more before applying for a mortgage?

This guide explains:

• How deposit size impacts interest rates
• The role of LMI and its cost implications
• Smart strategies to grow your deposit
• Whether it’s wiser to buy now or wait and save

By the end, you will have the insights you need to make informed, cost-effective mortgage decisions.

How Deposit Percentages Affect Mortgage Rates

Lenders use the Loan-to-Value Ratio (LVR) to assess risk. LVR is the portion of the property’s value you need to borrow. A larger deposit means a lower LVR, which generally secures you better interest rates.

Deposit Size (% of Property Value)	LVR	Typical Interest Rate Range	LMI Required?
5%	95%	6.5% – 7.5%	Yes; adds thousands
10%	90%	6.0% – 7.0%	Yes; slightly lower LMI
15%	85%	5.5% – 6.5%	Yes; smaller LMI cost
20%	80%	5.0% – 6.0%	No LMI required
30%	70%	4.5% – 5.5%	No LMI; best rates

Key takeaways:

• Deposits under 20% typically come with higher rates and LMI.
• A 20% deposit helps avoid LMI and unlocks lower mortgage rates.
• Deposits over 30% often qualify borrowers for the most competitive rates.

The Role of Lenders Mortgage Insurance (LMI)

LMI is a hidden cost that applies when your deposit is less than 20%. It protects the lender — not you — if you default on the mortgage.

Example of LMI Costs by Deposit Size

Property Value	Deposit Size	LVR	Estimated LMI Cost
$600,000	5% ($30,000)	95%	$22,000 – $25,000
$600,000	10% ($60,000)	90%	$12,000 – $14,000
$600,000	15% ($90,000)	85%	$6,000 – $8,000
$600,000	20% ($120,000)	80%	$0

Impact of LMI on your mortgage:

• Increases total borrowing costs, sometimes by tens of thousands
• May lead to slightly higher interest rates due to higher risk
• Can often be rolled into the mortgage, increasing repayments

How to Save for a Larger Deposit and Secure Better Rates

Even if a 20% deposit feels out of reach, several smart strategies can help you save faster and improve your borrowing position.

1. Set a Specific Savings Target
   Use an online deposit calculator to determine how much you need, including LMI, stamp duty, and legal costs.
2. Use Government Schemes
   Investigate programs like:
   • First Home Guarantee (buy with 5% deposit and no LMI)
   • First Home Owner Grant (FHOG)
   • Stamp duty discounts in certain states
3. Open a High-Interest Savings Account or Use an Offset Account
   Place savings in an account earning competitive interest or use an offset account linked to an existing loan.
4. Boost Savings with Extra Income or Reduced Expenses
   Cut back on non-essential spending or take on part-time work, freelancing, or selling unused assets.
5. Consider a More Affordable First Purchase
   Buying a smaller or lower-priced home can help you build equity and work your way up the property ladder.

Should You Buy Now or Wait to Save a Larger Deposit?

This is a common dilemma, and both options have pros and cons.

Buying now with a smaller deposit:

• Enter the market sooner, before prices potentially rise
• Begin building equity sooner
• Access government programs that reduce LMI or boost affordability

Potential downsides:

• Higher interest rates and borrowing costs
• LMI costs add to overall expenses

Waiting to save a larger deposit:

• Qualify for lower rates and better loan terms
• Avoid LMI, saving thousands
• Stronger financial position when applying

Potential downsides:

• Risk of property prices rising while you save
• Delayed entry into the property market

The right choice depends on your local market conditions, income stability, and long-term financial goals.

Making Smart, Data-Backed Mortgage Choices

Your deposit size has a direct impact on your interest rate, borrowing costs, and loan terms.

Key points to remember:

• Larger deposits mean lower rates and no LMI.
• Deposits under 20% often trigger LMI and higher costs.
• Saving an extra 5–10% can unlock thousands in savings over your loan’s life.
• Government schemes and smart savings strategies can help you enter the market sooner.
• Always compare rates, fees, and lender terms before making a decision.