Let’s Talk About Your Deposit

If you are planning to buy a new home soon and you have a lower than ideal deposit then you might want to talk about your deposit with an expert.

The real estate agent will ask for a deposit. And that deposit is not the same as the bank deposit. The deposit that the real estate agent is asking for is really a commitment to the purchase.

In most cases these deposits are set at a standard 10%, although often with new builds, which can be done with the developer rather than an agent, the commitment may be 5%. The reason for this is the developers need to make it as easy as possible for people to commit to the purchase of a new build, especially given that the build may be taking a year or even more before the house is complete.

For the developers, they often have financed themselves on the development, and for that, the banks insist on having pre-sales before they advance all of that funding. You may have seen 5% deposit home loans advertised, and these do exist, but often with some quite stringent criteria attached.

Kianga Ora offers the first home loan, which effectively means that the government agency is guaranteeing the risk for the banks, but not all banks are engaged with these home loans. The idea is to help first home buyers, and therefore there is a criteria that you must fit to be eligible for these.

The biggest two issues with the criteria are the income caps and the length of time that you must have been in employment. The idea was that these home loans were designed for first home buyers, and potentially first home buyers that were unable to get a home loan with their normal bank. And so when the product was designed, income was seen as being one of the major contributing factors to that.

The expectation was that the banks would be happy to still lend to people on a higher income, but with a low deposit. And while that’s true to a degree, the banks are actually very hamstrung with what they can lend because they have restrictions placed on them by the Reserve Bank. In the industry, these are known as the LVR rules, whereby the banks can only do 15% of their overall lending where there’s less than 20% deposit. So if they’re not lending a lot of money, then they’re not able to do very much in the under 20% space.

First home loans are exempt from these rules, and new builds are also exempt. And that’s why you may see advertisements for 5% deposit home loans without too many restrictions.

So if we start looking at what the banks are saying, is that you need to have a 20% deposit. It seems to be the general rule that if you walk into the bank, they will suggest a 20% deposit is what is needed. And while they may be able to do it with less, they generally don’t go out there promoting that, purely because it is unreliable as to when they can offer lower deposits and when they can’t.

As mortgage advisors, we’re in dialogue with the banks all of the time to see whether they have the ability to lend with lower deposits. And every now and then they will reach out to us as well to say that they have the ability to fund some home loans with low deposits. Unfortunately, it’s quite a random thing, and so you could be talking to them one week and they have no ability, and yet the next week they do have an ability to fund a low deposit home loan.

The banks will also be able to fund low deposit home loans for new builds because that is exempt from those LVR rules we mentioned. Unfortunately, however, the risk with new builds has been quite high in recent years, since COVID, with prices escalating, even after the fixed price contract was agreed upon. We’ve also seen a number of building companies go into liquidation, so there is risk with new builds, and especially the time taken extends that risk.

Where we are seeing a lot of new builds being sold is properties that have been completed, or almost are complete, and the builder is needing to move them on. And so often these are being discounted and present pretty good value for money.

So many first home buyers are going to struggle with having a 20% deposit. The 20% can be made up from your KiwiSaver, you may be able to apply for a first home grant, and that can be included as your deposit, and also any savings that you have. The biggest problem is the dollar value of a 20% deposit, and you may argue that in some of the smaller towns, where you can buy a house for say $400,000, then that $20,000 is $80,000, which is still a lot of money. It gets worse in the bigger cities, where the house might be $700,000, and therefore to have a 20% deposit you would need $140,000. It’s pretty hard to save those sorts of amounts when you’re having to pay rent, and of course that’s after you’ve already paid tax on your income. Many first home buyers also have student loans and may have other debts. So these all use up money that could otherwise be used for savings.

So the advice that is often given to people is to put off buying a house and work on saving more and paying off all your debts. And that may seem quite a sensible type of advice to give, but it’s quite demoralizing as you’re sitting there trying to save money and watching house prices increase, often faster than you can save.

So what if you want to get in and buy a house now, to avoid that risk of price escalation? Well, the good news is, there are some options for you. If you have a 5% deposit, the options are a little bit limited and include the Kainga Ora first home loan, and you can also do the shared ownership options that are available with companies like You Own and ERA. As mentioned, at times some of the banks can offer 5% home loans, but these are not always available.

If you can reach 10%, then you do start to get more options. You still have the first home loans available, as it’s not restricted to 5% deposit, and can be available to anybody with up to 20% and even higher. But because of the costs, most people will only use that if they have less than 20% deposit.

With a 10% deposit, you will have more chance with the banks, but also there are some very good non-banks that specialize in this area. We have access to a credit union that is classified as a non-bank, and so is not restricted by the Reserve Bank rules, and yet their interest rates are generally better than the main bank’s interest rates for first home buyers. This is a very good option, but you need to have a minimum of 10% deposit. There are other non-banks as well that can offer home loans with a 10% deposit or allow you to get a second mortgage against the property to fund the shortfall.

Shared ownership is always an option if you have a lower deposit, and while they can do anything from a 5% deposit, the higher your deposit, then the less they need to contribute, and that is financially better for you.

The Bank of Mum and Dad can help first home buyers, but of course, for many people, that bank is closed due to a lack of funding. If you do have parents that are able to help, then that can be a good opportunity to get into the market earlier and take advantage of the lower interest rates offered to people that have a 20% deposit, even though your deposit may be 5% or 10%, and topped up from your parents. The key to using the Bank of Mum and Dad is making sure that everything is documented correctly to avoid any family issues in the future.

We often get asked about parents guaranteeing loans, and that’s one thing which we try to avoid where possible, and the preference is always to have either a gifted deposit or what is very common is to have the deposit that the parents provide treated.