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Low deposit mortgages

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

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By

Richard Whitten

&

Alison Loveder

Updated

Fact checked

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. However, these loans can come with the extra cost of lenders mortgage insurance (LMI) and more stringent application criteria.

Quick facts

  • 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, available through specific lenders. The scheme allows eligible borrowers to borrow 95% of their property value with a 5% deposit.
  • There are stricter lending criteria, as a lender scrutinises your application more closely if your deposit is under 20%. So you need to make sure all your mortgage documents and paperwork are to maximise your chance of success.

What is a low deposit mortgage?

Low deposit mortgages are the same as other mortgages, but they may have slightly higher interest rates to compensate for the bank taking on more risk when accepting your loan. 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.

Borrowers who take out low deposit home loans generally have to pay lenders mortgage insurance (LMI), although there are ways to avoid it – more on that soon.

LVR means the loan-to-value ratio. In other words, it’s how much you can borrow versus how big a deposit you need. For example, most loans have a maximum LVR of 80%, meaning you need a 20% deposit.

But mortgages also have a maximum insured LVR, which can be 80% or higher. So if a home loan has a maximum insured LVR of 90% or 95%, it’s a low deposit home loan.

Here’s a simple breakdown:

  • A loan has a maximum LVR of 80% and a maximum insured LVR of 80%. You need a 20% deposit, so this loan is not a low deposit home loan.
  • A loan has a maximum LVR of 80% and a maximum insured LVR of 90%. You can get this loan with a 20% deposit (and pay no LMI) or a 10% deposit (and pay LMI), so this is a low deposit home loan.

What is lenders mortgage insurance?

If you buy a property with a small deposit your lender views you as a higher risk borrower, which means you have to pay a lenders mortgage insurance (LMI) premium when you get the loan. A few things to know about LMI:

  • Even though you pay the premium, LMI does not protect you as a borrower; it protects your lender and allows them to recoup their money if you can’t repay your loan.
  • You take out this insurance to reassure the bank that if you can’t repay the mortgage for any reason, LMI kicks in, and the lender isn’t left out of pocket.
  • Importantly: even if the bank recoups their money through LMI, the insurer still chases YOU for the outstanding money.
  • Therefore, LMI helps you get a loan by giving guarantees to the bank – but it doesn’t mean you can walk away from your mortgage if your financial situation changes.

LMI premiums vary depending on your deposit size, property value and loan amount. It can add thousands or even tens of thousands to your loan. In addition, your LMI premium can often be added on top of your mortgage, so you pay it off over time rather than upfront as a lump sum.

For example, a $600,000 loan with a $60,000 (10%) deposit could generate an LMI premium of around $13,000. Understandably, LMI is one of the biggest costs of buying a property that low deposit borrowers need to budget for.

How do I compare low deposit mortgages?

When looking at low deposit mortgages, the same basic principles apply to any mortgage comparison. The biggest difference is you need to pay more attention to the maximum insured LVR that is on offer.

The main considerations are:

  • Interest rate. With every mortgage, a low interest rate means a cheaper loan with lower repayments. Review and compare the most competitive interest rates available.
  • LVR. Make sure the mortgage you are looking at has a maximum insured LVR of 90% or higher if you don’t have a 20% deposit saved.
  • Loan type and repayments. Your mortgage has a purpose: to fund an investment property or your own home. Your loan type and repayment type may be principal and interest or interest only, depending on this purpose.
  • Fixed or variable. You can choose between a fixed home loan rate or a variable rate. Fixed rates offer more certainty but less flexibility. Variable rates can go up or down but have more features and are less costly to refinance.
  • Loan fees. Most mortgages have fees, such as ongoing monthly account keeping fees or annual package fees.
  • Features. Some mortgages allow you to make extra repayments or come with an offset account. These features can help you pay less interest and/or repay your mortgage sooner, so look for a loan with features that benefit you.
  • Lender. Some lenders are small with few branches or “bricks and mortar” premises. Others are entirely online, while some still have extensive branch networks and in-person support. Different lenders may be willing to lend you more than others and accept low deposit borrowers. On the other hand, some lenders don’t offer any mortgages to borrowers with deposits under 20% – which is why you need to focus your research on those lenders whose loan criteria suits low deposit borrowers.

How to apply for a low deposit mortgage?

It can be harder to get a mortgage with a lower deposit as the bank wants to make sure it’s not taking on a big risk, which means you need to ensure your mortgage application is strong, with your paperwork in order and your everyday spending under control.

If your bank sees high credit card debt, low savings, bar tabs and retail shopping in your bank statements, it may be worried about your spending habits and less convinced that you will be responsible for repaying your mortgage on time every month.

Here are some tips to help you succeed when putting together your low deposit mortgage application:

  • 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. For example, they might require a 20% deposit or even 30%, so check the credit policy with prospective lenders before shopping for property.
  • Employment history. If the same company has employed you for several years, you are in a better position from a lender’s point of view because they view this as steady employment. On the other hand, regular job changes can make them more nervous about your reliability.
  • Examine your debts and spending. Strengthen your application by repaying debts such as credit cards – and as you repay them, lower the limits to avoid over-spending again. Try to limit your spending as much as feasibly possible before applying for your mortgage.
  • Talk to a mortgage broker. Mortgage brokers don’t just connect you to a lender; they help you find one likely to accept your application based on their eligibility requirements. Professional help might be just the thing you need.

Learn about mortgage brokers

Should I get a low deposit mortgage?

There are benefits and drawbacks to buying a property with a smaller deposit. First, you must know what works for your situation.

The benefits

Low deposit mortgages let you 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 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. Depending on your deposit size and the property’s price, this cost can range from several thousand dollars to the tens of thousands.

You also pay more interest with a low deposit mortgage 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.

You also need to consider how long it would take you to save $100,000 versus $25,000. It could take several more years to save a full $100,000 deposit in the example above, by which time home prices may have increased, meaning you need an even bigger deposit – or you have to pay LMI anyway, as your deposit is now worth less than 20%.

How to ensure your low deposit mortgage 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 an applicant of a low deposit mortgage can do is review their living expenses and tighten up their spending. Applicants should rein in their spending for the six months before applying for the mortgage.

2. Genuine savings and rental history

Some lenders like to see “genuine savings”, which means the applicant has consistently saved 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, 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 an excellent rental history and use it to boost their application in place of genuine savings. Now, that 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 because banks tend to trust the feedback from a property manager more than they do from a private landlord.

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

Make sure your financial circumstances don’t change from when 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. It would be best to keep your financial and employment situation stable from when 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% anymore, 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 property, they can theoretically guarantee a portion of your deposit for you. It’s a little complicated, and unfortunately, it’s not an option for everyone. Take a look at 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 investment and use the cash as a deposit, but you still may need to satisfy the genuine savings rule.

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