The quick answer is that you will need a 20% deposit to get your first home loan if you are a first home buyer in New Zealand. However, as with most things, there is some nuance to this and you can get a mortgage for a lower deposit, and be rejected with a higher deposit. This article will explain how banks decide on lending you money — and how much.
The quick answer is that you will need a 20% deposit to get your first home loan if you are a first home buyer in New Zealand. For example, if you want to buy a $500,000 house, you will need to have a 20% deposit. Your home loan amount will be $400,000.
However, as with most things, there is some nuance to this and you can get a mortgage for a lower deposit, and be rejected with a higher deposit. This article will explain how banks decide on lending you money — and how much.
A home loan deposit is the amount of money you are willing to put down towards your house.
Say for example you wanted to buy a $1 million house and you have $250,000 that you would like to put down. That $250,000 will be your deposit to start with. Your home loan will then be $750,000. This is the amount on which you pay interest on.
Property price x 0.2 will give you the deposit that you need. For example, for a $800,000 property, a 20% will be $160,000.
Your deposit should be as high as possible, especially if you are a first home buyer! The higher your deposit as a percentage to your house price,
Let’s run through a few scenarios for a property that costs $700,000:
As you can see, the difference between even a 10% and 20% deposit is huge in terms of the total house cost, and weekly repayments.
While we can recommend you to have the highest deposit possible, you need to take into account your life circumstance, what the property market is doing and your career path.
It might not be practical for you to save up to a 50% deposit, and in these situations, it is best to buy at a weekly repayment that you can afford.
Another thing that you could do is consider buying with friends and/or family. This could help you to build a bigger deposit faster, and split the weekly repayments. This will make getting into your first or second home a lot faster and at a lower weekly repayment.
While the readily accepted deposit is 20%, there are opportunities to have a lower deposit. For example, if you are buying a ‘design and build’ you can have a deposit of 10%. But a deposit lower than 20% will classify you as a ‘low equity home loan’ borrower. This comes with additional fees and expenses such as:
The reason for these added costs is because the bank is taking on additional risk. The higher the risk, the higher the return (for the bank). Also, 10% of the money lent out can only go to low-deposit borrowers.
To be successful in getting a low deposit home loan, banks will pay particular interest to the following:
If your goal is to buy a house as fast as possible, we highly recommend you buying it with friends or family. But this comes with its own risks. And this is where Slice is here to help.
We can help you put together a co-ownership agreement and work with solicitors that know what they are doing. This will make getting into a home you own faster and more affordable.
To obtain a no deposit home loan in New Zealand, you can use existing equity in a property you already own. You can ask your bank for a top up at the appropriate time and use it as a deposit on an investment property. By doing this, you can purchase an investment property without a deposit.
You can’t do this as a first home buyer or for your first home loan.
But what you can to is get together with some friends and family and put together a deposit. This will lower the amount each person needs to put in to buy a property. It will also spread the weekly repayments so its more affordable to get into a first home. We can help with that at Slice.
This one is obvious. And it doesn’t need to be a radical shift. Even little things like not buying coffee and making your own lunches can have a huge impact on achieving your savings goals.
If you have credit card loans, high purchase or any other high interest debt, pay it off as fast as possible. It is better to pay off debt than to save because of the interest rate.
KiwiSaver is not only a retirement savings scheme, it can also help you buy your first home. By allowing you to withdraw most of your funds for an equity deposit, KiwiSaver can ease the burden of purchasing a home.
For you to be able to withdraw your KiwiSaver to be part of your deposit, you will need to be contributing towards your KiwiSaver for at least 3 years. All but $1000 can go towards a first home deposit. You will also need to work with your solicitor to withdraw your KiwiSaver money.
A First Home Grant of up to $10,000 could be available to you if you’ve been making regular KiwiSaver contributions for at least three years. They don’t even need to be in consecutive years.
There are however some criteria:
If you want more information, you can find it on the Kaina Ora website.
You can accept cash gifts to form your deposit from friends and family, or you can buy with them. When you accept a gift, lenders may not take it into consideration when deciding on your pre-approval. Lenders want to see the owners of the property being able to service the repayments on the home loan.
Even if you have been gifted 20% from friends and family, lenders may still not lend to you. Typically, lenders want to see that you can save at least 5% of your deposit.
The benefit of buying with friends and family is that they can directly contribute to a deposit and also see a return on investment when the house is then sold. And if you do decide to go down this pathway, we highly recommend you to put together a co-ownership agreement. This will ensure that everyone is aware of their rights, responsibilities and potential rewards. This is quite different to your friends and family giving you a gift which lenders may not readily accept anyway (and rightly so).
Lenders don’t just look at the amount of money that you have for your deposit, but how that money was put together. For example, lenders consider savings built over time more favourably than a family member gifting money.
Other forms of ‘money’ that lenders look at fondly include:
With Kainga Ora’s First Home Loan Scheme, you will only need a 5% deposit. The loan is underwritten by Kainga Ora. However there are some criteria:
There is also a 5% deposit criteria: This can include money:
This is not an exhaustive list and more information can be found on the Kainga Ora website.
An interest-only mortgage is where you pay interest on your loan, but don’t pay any of the principal. This means:
While this sounds tempting, it does have its risks. For example,
This type of home loan is more popular with investors than first home buyers.
Suppose you and the house seller agree on a price. You then sign a sales and purchases agreement. You pay a percentage of the house price to the real estate agent to keep in a special account until the settlement date.
💡 Case study:Suppose Nigel, John and Jolyene are buying a house for $1 million. They have saved up $250,000 so they have a 25% deposit. They have signed a sales and purchases agreement. The purchase deposit is 10%. Nigel, John and Jolyene give $100,000 to their real estate agent in a trust account until the settlement date. On settlement date, the $100,000 will go to the vendor (the person selling the house).
An equity deposit is what you work out with your bank. This typically happens before signing a sales and purchase agreement. It represents the total deposit going towards the home loan.
💡 Case study: Nigel, John and Jolyene are friends. They are buying a house for $1 million. They have saved up $250,000. They agree with their bank that their total home loan deposit is going to be $250,000. The sale and purchase agreement states a purchase deposit of $10% so they put give $100,000 to the real estate agent to put in a trust account until settlement date. The remaining $150,000 contributes to the home loan. The home loan amount is $750,000.
The simple answer is that banks require a 20% deposit because it shows your ability to save and stick to a plan.
The more complex answer is that banks need to show a 80% loan to value ratio (LVR). This means for every $100,000 they lend out, there needs to be at least $20,000. This was introduced in around 2021 to cool off the housing market. Before this, banks were giving out home loans to deposits as low as 5%.
Ultimately, banks care about your ability to service the loan. But that was when interest rates were quite low (around 2 - 3%). Now they are closer to 7%. If lots of people had a 95% home loan and the house prices kept on going down, but interest rates going up, lots of people could no longer afford their home. This would lead to lots of mortgagee sales and put the banks under a lot of pressure.
The 20% deposit is like a margin of safety for the banks as much as it is a way to show your bank that you can save and stick to a plan.
You can put down a 10% deposit and even go as low as 5% to get into your own home. But this comes with lender strings and criteria. It is best to work with the building company, your lender AND a broker to work out what is best for YOU. There is also a difference between buying a house and land package vs demolition the house you are currently in and building a new one.
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