Getting A Home Loan With A 5% Deposit
Let’s look at getting a home loan with 5% deposit.
As mortgage brokers we are often asked what deposit is needed for a home loan.
The New Zealand banks are restricted by Reserve Bank rules (LVR rules) which means that they will normally ask for a 20% deposit; however they still have the ability to do some lending with as little as 5% deposit. They have always had the ability to do this, but in most cases they won’t unless the applicants are deemed as very attractive to the bank and there is good reason for not having the deposit available.
There are two specific types of loans where you can get a home loan with a 5% deposit;
1: First Home Loan
First Home Loan is exempt from the LVR rules introduced by The Reserve Bank.
From the 1st October 2019 the Government backed Welcome Home Loan has had a name change to First Home Loan. Another change is the deposit that was required for a Welcome Home Loan was 10% and now with the First Home Loan it has been reduced to 5%.
The First Home Loan is managed by Housing New Zealand and we have contacted them today to see if there are any other changes but they are not aware of any yet.
One issue with Welcome Home Loans and that will remain with First Home Loan is that not all banks have chosen to be part of this scheme.
Other issues are the house price caps and income caps which mean it is often not going to work.
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Note: The announcement from the Government in the KiwiBuild reset lacked detail and Housing New Zealand staff who managed the Welcome Home Loans and First Home Loans knew very little about any of the changes. We will be checking and updating this post next week once the Housing New Zealand website is updated in case there are other changes that we are not aware of. We will also be checking with the banks to see if they will be offering the 5% deposit loans and what the individual bank criteria will be.
2: New Build Finance
New Build Finance is also exempt from the LVR rules introduced by The Reserve Bank.
The banks are therefore able to offer home loans for new builds with less than 20% deposit.
Most banks will offer finance for both turn-key and progress payment builds with 10% deposit and a few will offer lending with a 5% deposit.
The issue with financing builds is the high risk for cost overruns. Most builds are financed with fixed price contracts, but often they have PC sums (price cost estimates) for some of the work including but not limited to the ground work. With lower deposits the banks want to eliminate the risk of cost overruns so will want a contract with no PC sums.
There can be other ways to get a low deposit home loan.
You can get low deposit home loans with the banks at times, and some banks will allow you to use guarantors. The non-bank lenders will often do home loans with 10% deposit and they will generally allow a second mortgage which can be used to fund the balance of what would otherwise be your deposit.
Speak to your mortgage broker and they can help explain the options.
Are There Extra Costs?
When you require a home loan with a 5% deposit there will be extra costs.
Welcome Home Loans (First Home Loans) charges a Lender’s Mortgage Insurance (LMI) premium of 1% of the loan account and the lender may also apply a loan application fee.
The banks will charge a low equity margin too which is an increase on the home loan interest rate. These vary in the way that they are calculated so you want to ensure that you select the right bank or that your mortgage broker knows about the differences too.
How To Get A Home Loan With A 5% Deposit
It is not easy to get a home loan with a 5% deposit, but it may be possible.
The easiest way to get started is to complete an online application (use the link below) and one of our team can check before discussing with you.
It costs you nothing to assess your situation, so why not find out today.