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Low deposit mortgages

Mortgages that allow deposits under 20% so you can buy your property sooner.

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Low deposit home loans

A low deposit mortgage lets you borrow more than 80% of a property’s value, which means you can save a 5-10% deposit and borrow the rest. It’s a popular option for borrowers looking to buy their first home.

You can get a home loan with a 5% deposit

New Zealand homebuyers typically save a 20% deposit and borrow 80% of the property’s value. However, it’s possible to borrow up 95%, meaning you only need a 5% deposit.

Quick facts

  • A low deposit mortgage has a maximum insured loan to value ratio (LVR) of 90% or 95%.
  • First home buyers can use the First Home Grant as part of their deposit if they’ve contributed to KiwiSaver for at least 3 years.
  • Another alternative for first home buyers is the First Home Loan Scheme, which is available through certain lenders. The scheme allows eligible borrowers to borrow 95% of their property value with a 5% deposit.
  • If borrowing more than 80%, you may have to pay lenders mortgage insurance (LMI).
  • You can get a mortgage with a 5% deposit from lenders who offer First Home Loans.
  • There are stricter lending criteria, as a lender scrutinises your application more closely if your deposit is under 20%. You need to make sure all your mortgage documents and paperwork are in order to maximise your chance of success.

Should I get a low deposit mortgage?

There are benefits and drawbacks to buying a property with a smaller deposit. It’s vital that you know exactly what works for your own situation.

The benefits

Low deposit home loans allow you to buy property faster. If you’re buying a property for $500,000 then a 20% deposit is $100,000. A 5% deposit is only $25,000 while a 10% deposit is $50,000.

Buying a property sooner means borrowing more but getting into the property market faster. If prices jump up suddenly this puts you in a better position. Even with a small deposit, you’re actually growing your equity value via capital gain.

Plus, sometimes saving a 20% deposit feels like an impossible goal, especially if you’re paying a lot of money in rent.

The risks

A low deposit mortgage means you may have to pay LMI premiums. This cost can range from several thousand dollars into the tens of thousands, depending on your deposit size and the cost of the property.

You also pay more interest with a low deposit mortgage, which is simply because you’re borrowing more money. Let’s look at a basic example.

Full versus low deposit home loans

DetailsLow depositFull deposit
Property value$500,000$500,000
Deposit size$25,000 (5%)$100,000 (20%)
Loan amount$475,000$400,000
LMI costs$15,960*$0
Interest rate (30-year loan)3.00%3.00%
Monthly repayments$2,002$1,686

*LMI costs are estimates only.

The difference in cost is clear. With a 5% deposit, you pay $15,960 in LMI (although you can capitalise this cost onto your loan and borrow the LMI money along with your mortgage). You also pay $316 more in repayments per month, or $3,792 a year.

Learn more in our guide to saving a deposit.

Speed and savings

You also need to consider how long it would take you to save $100,000 versus $25,000. Assuming you have a 5% deposit in the example above, you’re paying $2,002 in monthly repayments. If you were to save this money instead each month (assuming you didn’t have to spend it on rent), it would take a little over 37 months to save the extra $75,000 needed to reach a 20% deposit.

That’s three whole years.

The risk of negative equity

Equity refers to the amount of the property you actually own. In other words, the value of the property minus the mortgage debt. If you buy a home with a 20% deposit you have 20% equity at the start. As you repay the loan principal (the money you borrowed) your equity increases.

But if property prices fall (as they sometimes do) your equity will decrease. If you’d paid off half your mortgage then you’re still in a decent position. But if you’ve just bought a property with only a 5% deposit then even a small price fall could see you end up in negative equity. Having negative equity makes it much harder to sell your property or refinance your mortgage.

As long as you keep making repayments on the mortgage principal your equity should increase in the long term.

Eligibility and the application process

It can be harder to get a mortgage with a lower deposit, so you need to make sure your application is watertight.

Here are some tips to help you succeed:

  • Check your credit score. Strengthen your chances of success by making sure there are no issues with your credit history.
  • Check where and what you’re buying. Some lenders impose higher lending requirements on apartment purchases in certain postcodes. They might require a 20% deposit or even 30%. It’s worth checking with prospective lenders before applying.
  • Employment history. If you’ve been employed by the same company for several years you are in a better position from a lender’s point of view.
  • Examine your debts and spending. Strengthen your application by paying down urgent debts such as credit cards. Demonstrating that you have a long history of savings, and try to limit your spending as much as you feasibly can before applying.
  • Talk to a mortgage broker. Mortgage brokers don’t just connect you to a lender, they help you find one that is likely to accept your application based on their eligibility requirements. Professional help might be just the thing you need.

Learn about mortgage brokers

Other expenses to consider

When you are buying a property there are other related costs that you need to be aware of, including:

  1. A registered valuation. Banks typically ask for a property to be valued if you have less than a 20% deposit. The valuation could cost $400 to $700, and it needs to be paid upfront.
  2. Legal fees. Conveyancing costs are paid so your lawyer can check that everything is legally fine with the property and arrange transfer of ownership. It is probably best to budget approximately $1,500, but the cost does depend on the lawyer you use. If you don’t have a lawyer you know and trust, it is best to obtain a few quotes.
  3. Moving costs. If you don’t have any kind friends with a van, it may cost you up to $400 to move within a town or city. If you are moving between locations further apart, this will be more.
  4. Furniture and fittings. It is wise to budget for any essentials that you may find yourself without when you move to your new property.

How to ensure your low deposit home loan application is accepted

Three tips to make your mortgage application look more attractive to potential lenders.

1. Tighten up your spending

The most important thing for an applicant of a low deposit mortgage can do is review their living expenses, and if they can to tighten up their spending. Applicants should rein in their spending for the six months prior to applying for the loan.

2. Genuine savings and rental history

Some lenders like to see “genuine savings”, which means the applicant has been consistently saving each month or fortnight to build up their savings. If that’s not the case, and they are given the deposit as a gift from parents then lenders often want to see that sum of money sitting in the applicant’s account for three to six months before applying.

If the applicant is renting, they can prove they have a good rental history and use that to boost their application in place of genuine savings. Now, that really only works for applicants renting through a property manager. Sometimes applicants renting from a private landlord find that the bank is reluctant to accept the landlord’s word. The banks trust the feedback from a property manager more than they would from a private landlord.

3. Don’t make big changes between pre-approval and settlement

Make sure your financial circumstances don’t change from the time you apply for finance to at least settlement. A fundamental mistake is that buyers receive pre-approval and then quit their job, apply for a car loan or increase their credit card limit. People don’t realise how this impacts their application. You need to keep your financial and employment situation stable from the time you apply until you settle and move in. Then you can do what you like.

No deposit loans, guarantors and other options

You can’t borrow 100% any more, as lenders consider it too risky (a lesson they learned from watching the GFC unfold in other countries). The exception to this is a parental guarantee. If your parents own a property they could theoretically guarantee a portion of your deposit for you. It’s a little complicated and unfortunately, it’s not an option for everyone. Read our guide to learn more about guarantor home loans. If your parents are even more generous and financially comfortable they could gift you the deposit.

Another option is to sell shares or other assets. You can sell off an investment and use the cash as a deposit but you still may need to satisfy the genuine savings rule.

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