It Is Okay Not to Have a Bigger Deposit

It is funny how often as a mortgage broker in Palm Beach I chat with people who are absolutely convinced they need a massive deposit saved up before they can even think about buying a place. They have this idea in their head, often picked up from somewhere or another, that unless they have a 20% deposit ready to go, they are just wasting their time. It is a really common belief, and I see it create a lot of unnecessary stress and, to be honest, it often stops people from even exploring their options. They end up waiting for years, diligently saving every dollar, only to find that property prices have moved up in the meantime, sometimes by more than they have managed to save. It is a bit of a treadmill that way, and it can feel pretty disheartening when you are caught in that cycle.

I get why people think that way. There is a lot of talk out there about the benefits of a big deposit. And sure, having more equity from day one can be a good thing for plenty of reasons. It can mean lower repayments, less interest paid over the life of the loan, and sometimes access to a wider range of loan products. But it is not the be-all and end-all, and for many people, especially those just starting out or those wanting to get into their own home sooner rather than later, it is just not realistic. Life happens, and saving a huge lump sum takes time and discipline that not everyone has in spades, particularly when rent and living costs are already so high.

The thing is, the property market does not wait for anyone. If you spend five or ten years meticulously saving up a 20% deposit for a home that costs, say, $700,000, you are aiming for $140,000. That is a huge amount of money to put away, especially when you factor in all the other costs of living. During those years, that $700,000 home might easily become an $850,000 home, or even more. Suddenly, your target deposit is $170,000, and you are still chasing your tail. It is a bit like trying to hit a moving target, and it can be incredibly frustrating.

Sometimes, getting your foot in the door with a smaller deposit can be a really sensible strategy. It lets you start building equity sooner, and you get to ride the wave of any property value increases rather than watching them from the sidelines. Imagine if you had bought a house five years ago with a smaller deposit, and that house has gone up in value by, say, $150,000 since then. That increase in value is yours, building your wealth, rather than being something you missed out on because you were waiting to save up a bigger initial chunk of money. Of course, property values can go down too, but historically, over the long term, they tend to go up.

Now, when you have a smaller deposit, generally anything less than 20% of the property value, lenders will typically require something called Lenders Mortgage Insurance, or LMI. This is a one-off fee that protects the lender, not you, in case you cannot make your repayments and they end up losing money if they have to sell the property. It is often seen as a bit of a hurdle, an extra cost that people would rather avoid, and understandably so. Nobody wants to pay more than they have to.

But here is the thing about LMI: it can sometimes be the key that unlocks home ownership for you, allowing you to get into the market years earlier than you otherwise would. Think of it as a cost of entry, a premium you pay for the opportunity to buy sooner. If the property you buy increases in value by more than the LMI premium over a few years, then financially, it has worked out in your favour. It is about weighing up the cost of LMI against the potential benefits of getting into the market earlier.

For example, let us say LMI on a particular loan might be $15,000. That is a decent chunk of change, no doubt. But if waiting another two or three years to save up enough to avoid LMI means you miss out on a property value increase of, say, $50,000, then paying the LMI might have been the better option. It is not always a straightforward calculation, and everyone's situation is different, but it is worth looking at it from that perspective.

Some people also get caught up thinking about the interest they will pay on a larger loan amount if they have a smaller deposit. And yes, logically, a bigger loan means more interest over time. But again, it is about balancing that against other factors. What is the cost of renting for those extra years while you save? How much could property values appreciate in that time? What is the opportunity cost of not being in your own home, not building that equity?

It is also worth remembering that interest rates fluctuate. The rate you start with might not be the rate you have in five or ten years. You might also be able to refinance your loan down the track when your equity has grown, potentially getting a better deal or even reducing your repayments. So, focusing solely on the initial interest amount of a slightly larger loan might not tell the whole story of your long-term financial position.

Another angle to consider is your own personal circumstances and goals. For some, having that huge cash buffer in an offset account or redraw facility from day one is really important for peace of mind. For others, the priority is simply getting out of the rental cycle and having a place to call their own, even if it means starting with a smaller deposit. Neither approach is right or wrong; it is just different priorities.

Life is unpredictable too. While you are diligently saving for that 20% deposit, unexpected expenses can crop up. A car breakdown, a medical bill, a period of unemployment , any of these can derail your savings plan and set you back significantly. Sometimes, getting into a home sooner, even with a smaller deposit, provides a bit more stability and a long-term asset that can help weather those unexpected storms.

There are also situations where a smaller deposit is not just acceptable, but actually encouraged by various government schemes, particularly for first-home buyers. These schemes are designed to help people get into the market sooner by reducing the deposit required or helping with LMI. It is worth looking into what might be available in your state or nationally, as these can make a big difference to how quickly you can achieve home ownership.

One common misconception is that a smaller deposit means you are seen as a higher risk borrower by all lenders, and that will make it impossible to get a loan. While it is true that lenders assess risk, and a smaller deposit does factor into that assessment, it is far from an automatic