How Much Deposit? A Worked Example of What It Changes

A larger deposit reduces cost and risk but consumes liquidity. A calculation comparing three levels on the same purchase.

The deposit decision is usually made by what is available rather than by what is optimal. Where there is a genuine choice, the trade-off between reduced cost and retained liquidity deserves the few minutes it takes to quantify.

The situation

A buyer purchasing a property at SAR 900,000 has SAR 400,000 available and is deciding how much to commit as deposit and how much to retain.

Assumptions (illustrative)

• Property price: SAR 900,000.
• Transaction costs: assumed SAR 27,000.
• Capital available: SAR 400,000.
• Option 1: deposit SAR 180,000, financing SAR 720,000.
• Option 2: deposit SAR 270,000, financing SAR 630,000.
• Option 3: deposit SAR 360,000, financing SAR 540,000.
• Assumed financing cost: 5 per cent of the outstanding amount per year, simplified.
• All figures are illustrative assumptions used to demonstrate the method.

Step 1: Annual financing cost under each option

Option 1 about SAR 36,000, Option 2 about SAR 31,500, Option 3 about SAR 27,000 in the first year.

Each additional SAR 90,000 of deposit reduces the first-year cost by roughly SAR 4,500 on these assumptions.

Step 2: Liquidity retained after costs

After the SAR 27,000 of transaction costs: Option 1 retains SAR 193,000, Option 2 SAR 103,000, Option 3 SAR 13,000.

Option 3 leaves almost no reserve, which converts any unexpected cost into a borrowing decision.

Step 3: Cost of the retained liquidity

Retaining SAR 193,000 instead of Option 3 costs about SAR 9,000 per year in additional financing cost.

That is the price of the reserve. Whether it is worth paying depends on how likely you are to need it.

Step 4: What the reserve protects against

A reserve covering several months of obligations plus a significant repair is the difference between an inconvenience and a forced sale.

The reserve is insurance, and insurance is worth paying for when the event it covers would be severe.

Step 5: The middle position

Option 2 costs about SAR 4,500 more per year than Option 3 while retaining SAR 103,000.

A middle deposit usually produces most of the cost benefit while preserving a meaningful reserve.

Step 6: Over a longer horizon

Across ten years the difference between Options 1 and 3 accumulates substantially, which argues for a larger deposit where liquidity permits.

The reserve question is short term and the cost question is long term, which is why the answer is usually a balance rather than an extreme.

What changes the answer

• Higher financing costs strengthen the case for a larger deposit.
• Unstable income strengthens the case for retaining liquidity.
• If the retained capital earns a return above the financing cost, the calculation shifts toward a smaller deposit.
• Requirements from the financier may set a minimum that removes part of the choice.

What the numbers tell you

• Quantify what the retained reserve costs you each year, then decide whether the protection is worth it.
• Avoid committing every available riyal to the deposit, since the reserve prevents small problems becoming large ones.
• Compare across a realistic horizon, because the cost difference compounds while the reserve need is immediate.
• Treat any minimum deposit requirement as a floor, not as a target.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

If you are weighing a financing decision, Domira can review the offers, model the total cost and stress test the obligation with you before you sign anything.