How does the size of my deposit affect my home loan interest rate?

Unlocking the Key to Home Loan Interest Rates: The Home Loan Deposit Dilemma in Australia
Erin Howell
Written by
Erin Howell
Imogen Baxter
Reviewed by
Imogen Baxter
Last updated
May 17, 2024
0 minute read
Table of contents
row houses purchased with a large deposit which lowered the mortgage interest rate

Owning a home in Australia is a dream for many, but the journey begins with a critical question: How does the size of your deposit impact your home loan interest rate?

Buying a home is no walk in the park. For most of us, this means years of scrimping and squirrelling away some genuine savings. While buying a home with a house deposit as low as 5% of the value of the property is possible with a low deposit loan, a 20% deposit is the norm for a traditional owner-occupier mortgage in Australia. Housing prices might be prohibitively high for many, but saving up more might save you money on ongoing payments.

For one, having a larger deposit than 20% means you have to borrow less from the bank. A large deposit means smaller interest rate repayments, no Lenders Mortgage Insurance (LMI) costs, and easier home loan approval.

OwnHome Deposit Boost Loan

OwnHome is on a mission to remove the deposit hurdle from homeownership for Aussies. By pairing our deposit boost with your preferred home loan, you get to move into your dream home sooner and be a 100% owner. Here's how it works:

How does OwnHome work?

OwnHome provides an instant deposit loan for a small fee, so you don't have to wait years before buying your home. Here’s how it works:

You’re stuck renting but want to buy a home. You’ve worked hard and know that you could cover the mortgage payments on a place.  

At the moment, you've only saved up $60,000, and to avoid paying lenders ’ mortgage insurance (LMI), you need a 20% deposit ($180,000).  

It will take you many more years to save the rest of the deposit amount, even for a low-deposit home loan.

You're really keen on entering the housing market now as you're unsure what the housing market will be like in the long term. Instead of waiting years to reach the 20% deposit amount through saving and renting, you use an OwnHomeDeposit Boost Loan.

With an OwnHome Deposit Boost Loan, for a Low Deposit Premium of 2.2%(and government fees) of the price of the property we loan you the 20% deposit and - with the help of our expert team of Buyer's Agents - you get into your own home today.

Plus, if you bring a deposit, the Low Deposit Premium can fall to as little as 1.1%.

The Basics: Home Loan Interest Rates and Repayments

When you embark on securing a home loan in Australia, understanding the relationship between your deposit size and the interest rate is paramount. Interest rates play a pivotal role in determining your monthly repayments. Generally, a lower interest rate translates to lower home loan repayments over the life of your loan.

What is LVR? How does my deposit impact my LVR?

Enter the Loan-to-Value Ratio (LVR), a critical factor that connects deposit size and property value. LVR is the percentage of the loan amount compared to the property's value.

A lower LVR, achievable with a larger deposit, often leads to lower interest rates. It's a symbiotic dance: a larger deposit reduces the lender's risk, resulting in more favourable interest rates, while a smaller deposit poses a higher risk for the lender.

What is Lenders Mortgage Insurance (LMI)? How does my deposit affect LMI?

For many first-home buyers, accumulating a sizable enough deposit to get on the property ladder can be challenging - especially in big cities like Sydney and Melbourne. Enter Lenders Mortgage Insurance (LMI).

The extra cost of Lenders Mortgage Insurance falls on you if you have less than a 20% deposit saved and need to borrow more than 80% of the purchase price.

While LMI safeguards the lender, it adds an upfront cost to your home loan. This is an extra expense (usually around 2-4% of the loan's value) you’ll need to factor into your calculations when budgeting for a loan for your new home, so saving for a larger deposit will allow you to avoid this additional cost.

So, the larger your deposit, the less likely you need LMI, saving you upfront costs and potentially reducing your interest rate.

What is borrowing power? How does my deposit impact borrowing power?

Your deposit isn't just a ticket to the homeownership party; it's also a key player in determining your borrowing power or buying power. Put simply, borrowing power is the amount of money a home buyer can loan from lenders and banks to buy a property.

A larger deposit often means a higher borrowing capacity, giving you more flexibility in choosing a property and negotiating a favourable purchase price. Other factors affect your borrowing power

Other considerations

Don't forget about additional upfront costs like stamp duty. Additional savings can ease the burden of these costs, providing first-home buyers with more financial breathing room but also taking away from your deposit. Additionally, many Australian states offer First Home Owner Grants and Home Guarantees, contributing to your deposit and amplifying your overall buying power.

You also must consider your credit score, a crucial element in any home loan application. Your financial situation, including the size of your deposit, also influences it. A larger deposit can positively impact your credit score, potentially opening doors to lower interest rates. Moreover, having a family member act as a guarantor can mitigate the need for a large deposit while still securing favourable terms.

The deposit size also influences the choice between fixed and variable interest rates. A larger deposit provides more flexibility to explore fixed-rate options, providing repayment stability over a set period.

In the dynamic Australian property market, understanding the nuances of deposit size is a game-changer. Navigating the complexities of deposit size, interest rates, and the myriad of factors involved in a home loan application is where a mortgage broker becomes invaluable. They can help you select the right mortgage type (fixed or variable rate) and loan term for you, as well as an interest rate and comparison rate that works for your financial situation, and  guide you through eligibility criteria and lending criteria, securing the best deal tailored to your financial situation.

Whether you're a first-time buyer or looking to refinance, a larger deposit can set you on a path of lower interest rates, reduced upfront costs, and an increased ability to shape your financial future.


No items found.
This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS), or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).
Prepared by OwnHome Services Pty Ltd ACN 664 492 059. This information does not take your personal objectives, circumstances or needs into account. Always read the disclosure documents for products and services before deciding on a product or service, and consider seeking independent legal, financial, taxation or other advice for your unique circumstances.

Latest articles

Start your pathway to homeownership
Make yourself at home! Log in and track your process. Or create an account in minutes and join thousands of Aussies already using OwnHome.