As a general rule of thumb, the larger the deposit you save to buy a home, the better the mortgage deal you will be offered from a lender. So if you can save a 20 per cent or 25 per cent deposit, you are likely to be offered better terms and rates than if you can only save a five per cent deposit.
It means saving as much as $50,000 for a home costing $250,000 if you are seeking lower monthly mortgage payments. Banks and non-bank lenders apply such lending criteria because a larger deposit means you are a lower risk borrower.
The lender will be less exposed to a financial loss if you default on your mortgage payments and the property value dips, falling into negative equity (where the value of your home is less than you debt you owe on it).
Lenders imposed heavy penalties for those with smaller deposits following the credit crisis as repossessions rose sharply on the back of financially over-stretched borrowers being unable to meet their loan payments.
And for a period immediately after the crisis, lenders stop offering mortgages altogether to those with smaller deposits as lenders deemed the risk too high.