Breaking into the property market can be extremely difficult. Especially with rising costs of living making it even harder to save a deposit. For many New Zealanders, low deposit home loans are the answer.
What are low deposit home loans?
Typically, when buying a home you require a 20% deposit, which can be extremely difficult for people to save. However, under the government’s First Home Loan Scheme, first home buyers can apply for low-deposit home loans with as little as 5% of the purchase price saved as a deposit.
There are restrictions of course, such as having an income of $85,000 or less for the previous 12 months, or under $130,000 for couples. In addition, there is a price cap that varies depending on the area you’re buying.
So, with the cost of living always going up, and saving becoming harder, low-deposit home loans make it much easier for people to break into the property market.
Comparing low-deposit home loans with standard mortgages
It’s important to note that low-deposit home loans don’t have a specific interest rate, and this varies between lenders. This factor is quite important because it does affect the overall cost of your mortgage, for example, over 25 years.
Also, your loan amount is higher at the start. Because you’re borrowing 95% of the property value rather than 80%, the total amount you owe is higher. This means more interest to pay over the life of the loan.
In addition, you’ll need to borrow extra to cover Lenders Mortgage Insurance (LMI), which is payable at a rate of 1% of the loan. The table below sourced from Mortgage Calculator highlights the different costs involved for a $500,000 home.
| Property Details | 5% Deposit for First Home Loan | 20% Deposit Standard Mortgage |
| Property Value | $500,000 | $500,000 |
| Deposit Size | $25,000 (5%) | $100,000 (20%) |
| Mortgage Amount | $475,000 | $400,000 |
| LMI Fee (1% of the borrowing) | $4,750 | $0 |
| Total Mortgage Repayable | $479,750 | $400,000 |
| Interest Rate (fixed, 25 year term) | 3.50% | 3.50% |
| Monthly Repayment | $2,402 | $2,002 |
| Total Cost of Mortgage over 25 Years | $720,522 | $600,748 |
Source: Mortgage Calculator
As you can see, while a low-deposit home loan helps you get into the property market more easily, it can add approximately $120,000 to the cost of a $500,000 mortgage if you stick to the minimum monthly repayments.
Improve your chances of a low-deposit home loan
While the requirement to save a lower deposit is helpful, you still need to meet a bank’s ordinary criteria when applying for a loan. This means having all the appropriate documentation, having a good credit history and also a stable financial position. Here are some tips to make it easier.
Check your credit history: Understanding your credit history is crucial, especially if there are inaccurate records affecting your credit score.
Maintain employment: Banks and lenders look more favourably on people with long-term, full-time employment. You can still get home loans without this, but it certainly helps.
Prepare financial records: banks usually want to see a lot of information, including bank statements, savings history, evidence of debts, payslips, taxation records and more. Ask your lender if you’re unsure, but having all of your financial documents prepared makes the process faster.
Pay down smaller debts: If you’ve got a few smaller debts such as personal loans or credit cards, attempt to pay those down as quickly as possible. Even if you intend to consolidate your loans into your mortgage (and remember, this means borrowing more, meaning you may need more than a 5% deposit), banks prefer home loan applicants to have minimal outstanding debts.
Focus on saving and financial health: Since you need to show your bank statements and savings records to your bank, it’s a good idea to tidy up your financial habits. Cut down on unnecessary spending, and pay bills on time. This will help you manage a mortgage when you get it, but it also looks good on your loan application.
If you’re looking to build your first home and you qualify for a low-deposit home loan (or of course any other type of loan), speak to the team at Stonewood Homes. We specialise in new homes, house and land packages and custom-designed homes to suit your needs. Contact us to find out how we can help.
FAQ
What if I have a bad credit history?
If you have a bad credit history, it’s a good idea to work with a financial planner. Not only will this help you to budget and save, but they will also have some ideas for repairing your credit history. In some cases, defaults on your record are inaccurate and can be rectified. There is no way to remove legitimate defaults, but it’s still worth investigating.
Can I save more than a 5% deposit?
You certainly can. The low-deposit home loan simply means you don’t need to save a 20%. But everything you save decreases the amount you need to borrow. As per the table above, the lower your deposit, the more you will pay over the life of the loan.
Do low-deposit home loans have higher interest rates?
In some cases, yes. It’s the bank or lender’s discretion as to what interest rates they offer on specific home loan products. So, many of them do increase the interest rate because lending 95% of a property’s value is a higher risk for them. Be very wary of this, because it can increase the cost of the mortgage even further.
