Your deposit is one of the biggest factors in how much you can borrow, what interest rate you're offered, and whether you'll pay Lenders Mortgage Insurance. This guide breaks down how deposits work, what loan-to-value ratio means, and how to think about the right deposit size for your situation.
What Is a Loan-to-Value Ratio?
Loan-to-value ratio (LVR) is the size of your loan compared to the value of the property, expressed as a percentage. If you buy a $700,000 home with a $140,000 deposit, you're borrowing $560,000, which is an LVR of 80%. The lower your LVR, the less risk a lender takes on, which is why smaller deposits (higher LVR) often come with extra costs like LMI.
Why 20% Is a Common Benchmark
A 20% deposit is widely used as a benchmark because it typically brings your LVR to 80% or below, which is the threshold many lenders use before requiring Lenders Mortgage Insurance. That said, 20% is not a strict rule — many lenders will approve loans with smaller deposits, just with LMI or slightly different terms attached.
A worked example
Consider a $550,000 property:
- A 5% deposit ($27,500) leaves a $522,500 loan, an LVR of 95%
- A 10% deposit ($55,000) leaves a $495,000 loan, an LVR of 90%
- A 20% deposit ($110,000) leaves a $440,000 loan, an LVR of 80%
As your deposit grows, both your loan size and your risk profile to the lender shrink, which is why bigger deposits are often rewarded with better rates and fewer added costs.
What Counts Toward Your Deposit?
Deposits are usually built from genuine savings over time, though some lenders also consider gifts from family, existing equity in another property, or savings held in term deposits. Genuine savings — money saved gradually rather than deposited as a lump sum shortly before applying — is generally viewed favourably by lenders, as it demonstrates a consistent savings habit.
Deposit Size and Your Interest Rate
Beyond avoiding LMI, a larger deposit can sometimes help you access lower interest rate tiers, since many lenders price loans according to LVR bands. It's worth comparing how your estimated repayment changes as your deposit grows — a mortgage calculator makes it easy to test a few deposit scenarios side by side.
Balancing Deposit Size Against Time to Buy
Saving a larger deposit takes longer, and property prices can move while you save. There's no universally "right" deposit size — it's a balance between minimising ongoing costs like LMI and interest, and not delaying your purchase indefinitely while chasing a bigger number. Many buyers choose a deposit that's comfortable for their timeline, and account for LMI as a cost of buying sooner rather than a reason to avoid buying altogether.
- Loan-to-value ratio (LVR) compares your loan size to the property value.
- A 20% deposit commonly avoids LMI, but smaller deposits are still an option.
- Genuine, gradually-saved deposits are generally viewed favourably by lenders.
- A bigger deposit can reduce both your loan size and your interest rate tier.
Use the Smarter Mortgage Calculator to see how different deposit amounts change your estimated repayments.
This article provides general information only and does not constitute financial, credit, legal or tax advice. Lending criteria, fees and loan conditions vary. Consider speaking with a lender, mortgage broker or appropriately qualified professional before making financial decisions.