Great income, not so great deposit

Great income, not so great deposit 4000 2670 Float Mortgages

Applying for a mortgage with less than 20% deposit

You’re in the market to purchase your first home, and with a decent income, you’re trying hard to squirrel away as much as you can. But truthfully, you’re struggling to get to that elusive 20% deposit. 

In New Zealand, it can be challenging to find a lender that will loan you more than 80% of the purchase price of a home – irrespective of how much you earn – but it’s not impossible. Referred to as a high loan-to-value (LVR) mortgage, this allows you to get a bigger loan, with less deposit, so that dream Kiwi home becomes a reality sooner rather than later. 

A word of caution: current LVR restrictions make it harder for banks to lend to buyers with low deposits. Although a high LVR mortgage might be your best – and only – option to secure a home loan, we recommend you work with a mortgage broker to ensure you meet all lending criteria and costs involved – like Lender’s Mortgage Insurance. Lenders will often apply much stricter lending criteria on those with low deposits: they’ll look at your credit rating, repayment history, property type and location, and the stability of your income.

Here are some of your options:

Get the help of a guarantor

Saving a 20% deposit in today’s market can feel like you’re paddling upstream – without the paddle. In Auckland, the median house price reached a whooping $870,000 in December 2017 according to REINZ. 

These days, it’s cheaper to go on a round-the-world trip than it is for first-home buyers to get a foot on the property ladder. With many (particularly young adults) struggling to save the necessary 20% deposit – even with good incomes – this has seen an increase in the number of parents, and grandparents, being called upon as guarantors. 

The role of guarantors is pretty simple – they’re the ones who are legally required to cover mortgage repayments if for any reason you’re unable to. Although simple in definition, becoming a guarantor doesn’t come without risks. Most guarantor home-loan arrangements require collateral – often in the form of property. If things go topsy-turvy for you, lenders are well within their rights to ask your guarantor to repay what they’re owed – and in some instances, this might mean your parents or grandparents could lose their own home.

Getting help from family and friends is a viable option for those who have a low deposit – and with careful consideration, can work out well for both parties. The best thing to do is to get advice from a good mortgage broker.

Apply for a Welcome Home Loan

Interest rates change, and the housing market in NZ is uncertain at the moment. Do you lock in five-year fixed term, or go for a floating rate? A mortgage broker has one job: to find you the best deal. Brokers know who offers what deals right now, and can predict interest rate changes, OCR increases and what the housing market is going to do. 

This option is specifically for first-home buyers. A Welcome Home Loan is a special home-loan option which requires a 10% deposit – making getting your first home a whole lot easier.

While only needing a 10% deposit takes financial weight off, you’ll need to meet all other Welcome Home Loan lending criteria. That includes a maximum income cap for solo and joint borrowers, the chosen house must cost less than the regional house-price cap, and only first-home buyers are eligible (Welcome Home Loans can’t be used to purchase investment properties). On top of this, you’ll also need to meet the lender’s usual lending criteria.

Welcome Home Loans are issued by Housing New Zealand and are only available through selected lenders. You’re best to get the help of a good mortgage broker who is familiar with the Welcome Home Loan process – and which lenders to approach.  

KiwiSaver HomeStart grant

Been contributing to KiwiSaver for more than three years? You might be eligible for a KiwiSaver HomeStart grant. Another Housing New Zealand initiative, if you have at least 10% saved (which can include the grant), you might be eligible for up to $10,000 towards an existing home, or up to $20,000 for a new home. 

Like the Welcome Home Loan, the KiwiSaver HomeStart grant comes with additional conditions, including maximum income caps, regional house price caps, and it’s only for first-time home buyers who are planning to live in the house for at least 6 months.

Use a personal loan

If you have a high enough income, you could consider getting a personal loan to use in lieu of a deposit. If you can prove you can afford to repay both a loan and a mortgage, and you tick all the other boxes for lending criteria, like good credit and responsible repayment history, you could approach certain lenders with the help of a mortgage broker. Be aware you might end up paying more in interest if you go down this path.

It’s almost always best to use genuine savings for a deposit – because it shows you can meet your repayment obligations – but there are some lenders who will allow you to use a personal loan to fund your deposit.

Turnkey house and land packages

Maybe you want to build your own home – consider a turnkey home and land package. These packages are designed to take the stress out of having to find land and contract builders – by handing over the process to property developers and builders, who work together to source land and build your home.

Usually only a small deposit is needed to start the build, and no mortgage repayments are required until after Code of Compliance is received and you’ve moved in – great if you’re still paying rent.

If your heart isn’t set on a specific piece of land, this might be a great option. There are lots of packages available, so be sure to do your research to find the one that suits you best.

Turnkey house and land packages

For first-home buyers, high LVR mortgages offer an alternative way to buy property in an unaffordable market. Unlike their traditional counterparts, high LVR home loan options often require much smaller deposits. 

If you’re willing to wade through the waters of the approval process, or you have the income to pay a mortgage with a slightly higher interest rate, things like co-signing with a guarantor, applying for a grant, or using other non-bank lending to fund your deposit might just be the right home loan option for you.

If you can prove you have a good income, but you’re struggling to save enough for a 20% deposit, get in touch with Float Mortgages to see what home loan options you might be eligible for.