How does the size of your deposit affect your loan?

Whilst the property market cools and first home buyers look to get into the market, many are faced with the question: is it best to pay Lenders Mortgage Insurance (LMI) and jump into the market now, or wait and save a larger deposit?

When purchasing your first home the size of your deposit is one of the most important factors effecting the size and conditions of your home loan. Whilst it may be ideal to save a 20% deposit, some lenders will allow you to borrow up to 90% or 95% of your home’s value, this means you may only need to save a 5% deposit to have your loan approved. Keep in mind, getting a loan with less than a 20% deposit means you'll have to pay lenders mortgage insurance. This is a once off cost that protects your lender, in case you’re unable to repay your debt.

When it comes to the property market, the biggest cost could be that of delaying your decision. Whilst it can be tempting to avoid paying Lenders Mortgage Insurance and wait until you have your 20% deposit to purchase a property, it may prove to be more financially rewarding in the long run to purchase now and reap the rewards of property growth.

There are a few reasons why it typically makes more sense to purchase now rather than wait until you have saved a larger deposit. Firstly, the growth rate of a property is typically substantially more than the cost of LMI. This means that is you save $1500 a month from your wages and the property market is increasing by 6%pa, in a year you have saved $18,000 but the $500,000 property you are saving to purchase has grown by $30,000 also. Essentially, the property’s Value has increased by more than you have saved. It is also important to remember that that if you decide to wait, you are also paying a year of rent – which is a year off somebody else’s mortgage.

If the suburb you are interested in purchasing in isn’t increasing in value, then there’s no harm in waiting. Keep in mind, if the suburb of your preference is experiencing a decrease in value – do not buy. Monitor the suburbs market conditions by looking at reliable sources such a RP Data, Australian Property Monitors and Residex – Waiting for the right time to buy will leave you in a better position.

It is important as a first home buyer you’re aware that obtaining a loan with less than a 20% deposit not only means you’re likely to be charged LMI, you are also subjected to higher fees and a less competitive interest rate. Whilst LMI can be borrowed along with the money required to purchase the property, it will affect the amount you are able to borrow.

For first home buyers that don’t have the 20% deposit saved and would like to avoid paying LMI there is another option if your parents own their home. Should your parents be in the financial position to support you, they could guarantee your loan - This means the lender will use your parent’s property as an additional security for you loan.

Your mortgage broker can provide advice based on your personal situation and build a range of scenarios to help determine what’s right for you. Before agreeing to any financial product, it is important understand the products available to you - Our friendly team are here to guide you through the process and provide you the confidence to move forward with your plans. We would love to hear from you via the live chat icon on our website – addisons.net.au, calling the office on 1300 736 509 or email to This email address is being protected from spambots. You need JavaScript enabled to view it..

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This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. All loans are subject to lenders terms and conditions – fees, charges and eligibility criteria apply.