What are the benefits of a bigger mortgage deposit?
A bigger mortgage deposit means borrowing less to buy your home, which reduces the interest you pay. It may also get you a lower mortgage rate and leave more of your monthly budget available to save or invest, although you’ll have less money available at the start.
The three benefits
Borrowing less reduces the interest you pay. Even with the same mortgage rate and term, there is less debt to charge interest on throughout the loan.
A larger deposit may also give you access to a lower mortgage rate, because you’re borrowing a smaller proportion of the home’s value.
Lower repayments leave more of your monthly budget available to save or invest, so the benefit can extend beyond the mortgage itself.
A worked example
The £60,000 is available after buying costs. We’ll compare a £30,000 deposit with a £45,000 deposit, keeping the same 25-year repayment term.
In both examples, £10,000 of the cash left stays in an emergency reserve. That leaves £20,000 to invest with the smaller deposit, or £5,000 with the larger one.
The mortgage costs
Both choices have the same £1,500 monthly budget for mortgage payments and investments.
At the same 4% mortgage rate, the extra £15,000 deposit saves £8,753 in interest over 25 years just by reducing the amount borrowed.
Now suppose the larger deposit gets a rate of 3.75%, while the smaller deposit stays at 4%. That reduces the interest cost further and brings the monthly payment down from £1,425 to £1,311.
From the same £1,500 budget, that leaves £189 to invest each month with the larger deposit, compared with £75 with the smaller one.
How do they compare after 25 years?
Suppose both investment pots grow at an assumed 4% a year, with monthly additions invested at month end. The smaller deposit starts with more invested, but the larger deposit adds about £114 more each month through its lower repayments.
At year 25, both mortgages are repaid. Each example includes the same £300,000 home and a £10,000 cash reserve earning no interest, so the difference is in the investments shown below.
| £30,000 deposit | £45,000 deposit | |
|---|---|---|
| Home + cash + investments | £401,399 | £419,484 |
The larger deposit finishes £18,085 ahead under these assumptions. The extra monthly investments more than make up for the £15,000 less invested at the start. The lower mortgage costs are already reflected in that result, so they are not an extra saving to add on top.
A bigger deposit won’t always come out ahead. Different mortgage offers, investment returns or time periods can change the result, which is why a comparison needs your own figures.