Should You Save a Larger Deposit?

Australia’s property market has long been an attractive investment destination for individuals looking to establish a foothold in the country or diversify their global portfolio. However, with the unique circumstances surrounding expats and foreign buyers, it becomes crucial to understand the role of a larger deposit in securing a mortgage and achieving your real estate goals.

Throughout this guide, we will address various considerations that expats and foreign buyers must bear in mind when contemplating the size of their deposit. We will explore the potential advantages and disadvantages of saving a larger deposit, including its impact on loan-to-value ratios, interest rates, loan approvals, and overall affordability.

Unmasking the Mortgage Mystery: Should You Save a Larger Deposit in 2023?

Deciding whether to save a larger deposit for a mortgage in 2023 depends on various factors and considerations. Here are a few points to consider:

  • Loan-to-Value Ratio (LVR): The LVR ratio is the proportion of the property’s value that you borrow through a mortgage. Saving a larger deposit allows you to reduce the LVR ratio, which can have several advantages. A lower LVR ratio generally leads to better mortgage interest rates and more favorable loan terms. Lenders often offer better deals to borrowers with a lower risk profile, which is typically associated with a lower LVR.
  • Mortgage Interest Rates: The interest rates on mortgages are influenced by various factors, including the overall economic conditions, central bank policies, and market competition. While it’s challenging to predict interest rate movements accurately, saving a larger deposit may give you access to more competitive interest rates. With a higher deposit, lenders may consider you less risky and offer you lower rates, which can result in long-term interest savings.
  • Affordability and Monthly Payments: Saving a larger deposit can help reduce the overall amount you borrow, resulting in smaller monthly mortgage payments. This can make the mortgage more affordable and ease your financial burden. However, it’s important to strike a balance between the size of your deposit and your immediate housing needs. Saving for a larger deposit may require additional time, during which property prices could rise, potentially offsetting the benefits of a larger deposit.
  • Other Financial Goals: Consider your broader financial situation and goals. Saving a larger deposit means allocating more funds toward your property purchase. However, it may limit your ability to achieve other financial objectives, such as investing, building an emergency fund, or pursuing other opportunities. Assess the trade-offs and determine if saving a larger deposit aligns with your overall financial plan.
  • Housing Market Conditions: Keep an eye on the housing market conditions in your area. Property prices can be influenced by factors such as supply and demand dynamics, economic trends, and government policies. If property prices are rising rapidly, waiting to save a larger deposit could result in affordability challenges. Conversely, if the market is experiencing a slowdown or prices are expected to stabilize, taking the time to save a larger deposit may offer advantages.

Remember, the mortgage market is influenced by numerous factors that can vary over time. Conduct thorough research, evaluate your personal circumstances, and seek professional advice before making a decision.

Get a free Australian mortgage assessment today.

Apply online to get a free recommendation with real rates and repayments.

The Balancing Act Between Deposit and Income

Finding the right balance between your deposit and income is crucial when considering a mortgage. Here are a few key points to consider:

  • Affordability: Lenders typically assess your affordability based on your income and expenses. It’s important to have a clear understanding of your monthly budget and how much you can comfortably allocate toward mortgage payments. Consider factors such as your regular expenses, savings goals, and potential future financial obligations.
  • Debt-to-Income Ratio: Lenders often use the debt-to-income ratio (DTI) to evaluate your ability to manage mortgage repayments. This ratio compares your monthly debt payments (including the mortgage) to your pre-tax income. Saving a larger deposit can reduce your monthly mortgage payment, resulting in a lower DTI and increasing your chances of mortgage approval.
  • Mortgage Lenders’ Criteria: Different lenders have varying criteria for mortgage approval. Some lenders may be more flexible with the deposit requirements, while others might prioritize income stability. Research and compare lenders to find one that aligns with your financial profile and goals. Keep in mind that even if you have a larger deposit, lenders will still consider your income and employment history.
  • Future Financial Goals: Consider your long-term financial goals beyond homeownership. Saving a larger deposit may require allocating a significant portion of your savings, potentially affecting your ability to invest in other areas or achieve other milestones. Find a balance that allows you to achieve homeownership while also pursuing other financial objectives.
  • Mortgage Affordability Stress Test: In some countries, mortgage lenders conduct affordability stress tests to assess your ability to handle higher interest rates or financial shocks. A larger deposit may result in a smaller mortgage amount, making it easier to pass the stress test. Ensure you understand the specific requirements in your region and how they might impact your mortgage application.

Remember, the decision to prioritize a larger deposit or higher income depends on your unique circumstances.

How Much Can You Borrow Calculator

To estimate how much you can borrow for a mortgage, you can use a mortgage affordability calculator. 

Our calculator takes into account factors such as your income, expenses, and other financial obligations to provide an approximate borrowing amount. 

The Deposit Dilemma: Is Bigger Always Better?

The decision of whether a bigger deposit is always better depends on various factors and individual circumstances. While a larger deposit can offer certain advantages, it may not always be the best option for everyone. Here are some points to consider when evaluating the deposit dilemma:

  • Loan-to-Value Ratio (LVR): A larger deposit allows you to reduce the loan amount and lower the loan-to-value ratio (LVR). A lower LVR generally leads to more favorable mortgage terms, such as lower interest rates and potentially avoiding private mortgage insurance (PMI) requirements. However, the impact of a lower LVR on interest rates and other terms can vary depending on market conditions and lender policies.
  • Affordability and Cash Flow: Saving for a larger deposit means committing more of your savings to the down payment, potentially leaving you with less cash on hand. It’s important to evaluate the impact on your overall financial situation and assess whether a larger deposit would strain your cash flow or compromise your ability to meet other financial goals, such as building an emergency fund or investing in other opportunities.
  • Property Prices and Market Conditions: Consider the trend and outlook of property prices in your area. If prices are rising rapidly, waiting to save a larger deposit could mean paying more for the same property later on. However, if the market is experiencing a slowdown or prices are expected to stabilize, taking the time to save a larger deposit might result in a better deal. It’s essential to research the local real estate market and consult with experts for insights into current and projected market conditions.
  • Opportunity Cost: Evaluate the potential opportunity cost of waiting to save a larger deposit. While it’s beneficial to reduce the loan amount and associated interest payments, consider the potential appreciation of the property value over time. If property prices are expected to increase significantly, it might be more advantageous to enter the market sooner with a smaller deposit rather than waiting to save a larger one.
  • Personal Financial Goals and Risk Tolerance: Assess your individual financial goals, risk tolerance, and timeline for homeownership. Consider your priorities, such as paying off high-interest debts, saving for retirement, or starting a business. Saving for a larger deposit might delay achieving these goals, so it’s important to strike a balance that aligns with your overall financial plan and aspirations.

Ultimately, there is no one-size-fits-all answer to the deposit dilemma. It’s important to evaluate your personal financial situation, market conditions, and long-term goals. 

Take The Next Step Towards Your Dream Home With Odin Mortgage

If you’re ready to embark on the journey of homeownership, Odin Mortgage is here to assist you. Our team of experienced professionals can guide you through the mortgage process and help you find the right financing option for your needs. Whether you’re a first-time homebuyer or looking to refinance, we offer a range of mortgage products and competitive rates to suit your requirements.

Contact us today to discuss your homeownership goals and get started on your mortgage journey. 

Get a free Australian mortgage assessment today.

Apply online to get a free recommendation with real rates and repayments.

Frequently asked questions

A larger deposit reduces the amount you need to borrow, often leading to lower interest rates and monthly repayments. However, saving for a larger deposit can take time and could mean missing out on a desired property due to rising market prices.

If you can afford to do so, depositing more than 20% may lead to lower interest rates and more manageable repayments. However, it could also tie up a significant portion of your savings in property, leaving less liquidity for other financial goals or emergencies.

Typically, a larger deposit can lead to lower interest rates because the lender takes on less risk. However, interest rates are also influenced by other factors, such as market conditions and your credit score.

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