A low deposit home loan lets you borrow more than 80% of a property’s value. This 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.
New Zealand homebuyers typically save a 20% deposit and borrow 80% of the property’s value. But it’s possible to borrow up 95%, meaning you only need a 5% deposit.
A low deposit mortgage will have 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 been contributing to KiwiSaver.
If borrowing more than 80% you may have to pay lenders mortgage insurance (LMI).
You can get a home loan with a 5% deposit from lenders who offer First Home Loans.
LVR means loan-to-value ratio. In other words, it’s how much you can borrow versus how big a deposit you need. Most loans have a maximum LVR of 80%, meaning you need a 20% deposit.
But every mortgage has two LVRs, maximum LVR and maximum insured LVR. If the maximum insured LVR says 90% you can get the loan with just a 10% deposit. But you need to pay lenders mortgage insurance.
LMI is an insurance policy that protects your lender (not you) if you can’t repay your mortgage. It can add several thousand dollars to your mortgage costs if your deposit is below 20%.
Should I get a low deposit home loan?
There are benefits and drawbacks to buying property with a smaller deposit. It’s vital that you know exactly what works for your own situation.
Low deposit home loans allow you to buy a 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.
And sometimes saving a 20% deposit just feels like an impossible goal, especially if you’re paying a lot of money in rent.
A low deposit home loan 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 loan. That’s simply because you’re borrowing more money. Let’s look at a basic example.
Full versus low deposit home loans
Interest rate (30-year loan)
*LMI costs are estimates only.
The difference in cost is clear. With a 5% deposit you’ll pay $15,960 in LMI (although can capitalise this cost onto your loan and borrow the LMI money along with your mortgage). You’ll also pay $316 more in repayments per month, or $3,792 a year.
Speed and savings
But 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.
Eligibility and the application process
It can be harder to get a loan with a lower deposit. You need to make sure your mortgage 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’ll be 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 card debt. 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.
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 applicants of low deposit home loans is to review their living expenses and if they can, to tighten up their spending. Applicants should reign 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.” That means the applicant has been consistently saving each month or fortnight to build up their savings bucket. If that’s not the case and they’ve been 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 actually prove they have good rental history and use that to boost their application in place of genuine savings. Now that really only works for applicants who are actually renting through a property manager. Sometimes applicants renting from a private landlord will find that hard for the bank to accept. The banks trust the feedback from a property manager more than they would from a private landlord.
3. Don’t make any 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 common mistake is that buyers get pre-approval and then quit their job or apply for a car loan or increase their credit card limit. People don’t realise how that 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 really borrow 100% any more. Lenders just 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.
Richard Whitten is a senior writer at Finder covering home loans and property. He helps everyone understand the ins and outs of mortgages so they can make smarter property decisions. Richard trained as a high school English teacher but found it easier to manage personal finances than a classroom full of kids. Before joining Finder, he edited textbooks and taught English to office workers in South Korea. Richard has a Bachelor of Education and a Graduate Certificate in Communication.
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