Buying your first home? Chances are, the first hurdle you’ll face is getting your deposit together, and you might be wondering how much is enough. Here’s what you need to know:
Long story short: ideally, you should aim for a deposit of about 20 per cent of the value of the home. In Auckland, that means you’d need about $130,000 for the average first home which stands at about $650,000.
One caveat, however: this is the ideal amount to go for; it isn’t mandatory. If you go through a mortgage broker, for example, they will be able to find you a lender that allows for low deposit lending. You may need to pay more in interest (at least to begin with), but you should still be able to get a loan.
You’ll likely hear stories from older Kiwis who talk about being able to get a home with far less than a 20 per cent deposit; possibly even no deposit at all. It’s true, this was a very common happening, but this was before the Reserve Bank of New Zealand put in some rules to control the flow of credit and mitigate the ups and downs of the property market. These are known as the loan-to-value ratios or the LVRs.
The LVRs are a set of rules for home buyers (including investors) which put a limit on the number of “high-LVR loans” i.e. loans where the borrower has less than 20 per cent deposit. Because of these restrictions, your bank can only allow a small number of borrowers with less than a 20 per cent deposit on their books, including you.
That isn’t to say you won’t get a high-LVR loan from your bank, it’s just that you may be less likely to get one.
If you find yourself with less than a 20 per cent deposit, don’t despair. There are alternatives.
Firstly, there are the built-in restrictions to the LVR rules. If you are building or buying a new home, such as an off-the-plan build or a Kiwibuild home, the LVR rules do not apply to you. This makes it much easier for the banks to give you a loan, and you may be able to borrow with less than a 20 per cent deposit. You may end up paying a premium on your loan because of your higher risk profile as a result of having a lower stake in the property, but you can still get the loan in the first place.
Secondly, if you have a 10 per cent deposit and fulfil some other criteria, you may be able to apply for a Welcome Home loan from select providers as well as a HomeStart grant if you are part of the Kiwisaver programme. The combination of these two grants will make it a lot easier to 1. Get a higher deposit and 2. Get a loan with a lower total deposit. If you are close to getting 10 per cent together, take a look at both of these.
Lastly, there are a number of young New Zealanders who are utilising family wealth to pump up their deposit, using the equity in the family home or getting a gift from their parents. In fact, there are estimates that about half of all new home buyers in Auckland are using family loans or cash gifts for their deposits. You aren’t alone in the struggle!
Getting a deposit together is one of the biggest challenges facing young New Zealanders. However, it is still perfectly possible to achieve with the right combination of grants, strategies and maybe a little help from family. For more advice on getting into your first home sooner, get in touch with the team at Money Empire today.