In New Zealand’s robust housing market, the dream of homeownership can seem just out of reach for many, especially given the challenge of saving for a deposit.
With the average house price in New Zealand sitting at $925,812 (Trading Economics, February 2024), you’ll need to save a whopping $185,162 deposit.
This is where low deposit home loans have emerged as a beacon of hope, enabling more Kiwis to climb onto the property ladder sooner than they might have thought possible.
But what exactly are these loans, and how can you successfully secure one?
In this post, I’ll explore low deposit home loans, and what you need to be aware of if you’re wanting to borrow more than 80% LVR.
Let’s help you get ready to turn the key in the front door of a place you can call your own.
Table of Contents
What is a Low Deposit Home Loan?
A low deposit home loan is a mortgage where the buyer’s deposit is less than 20% of the property’s purchase price.
In February 2024, $491 million in loans were issued in New Zealand with a loan to value ratio higher than 80%. Of this $371 million were first home buyers (statistics via RBNZ).
In New Zealand, there are various lenders and government schemes on offer to help first home buyers get into their first home with smaller than usual deposits. These include:
- Kainga Ora First Home Grant
- Using a KiwiSaver first home withdrawal
- Welcome Home Loans for first home buyers
- Various bank and non bank mortgages
One popular example is the First Home Loan, which allows eligible first-time home buyers to purchase a home with just a 5% deposit.
Benefits of Low Deposit Home Loans
The advantage of a low deposit loan is the lower initial amount needed, making home ownership accessible for more people.
If you have reliable income but haven’t had the opportunity to save a large deposit, this loan type can enable you to start building equity in a property sooner.
Getting into your own home means any repayments you make are contributing to your asset, not someone else’s, as with renting.
Drawbacks of Low Deposit Loans
Like anything that sounds too good to be true, there are catches, fees, and varying opinions between the banks when it comes to a low deposit mortgage loan.
It’s important to be aware of all the associated costs beyond just the mortgage amount. These additional expenses can significantly impact the overall cost of your loan.
Here are some additional fees, charges and information to consider.
Low Deposit Home Loans Attract Low Equity Premiums
Many banks charge a low equity premium or fee for loans with less than 20% deposit.
Here is a table showing how different low equity premium percentages can affect the total interest paid over the life of a 30 year mortgage loan, based on a home value of $800,000:
| Deposit % | Low Equity Premium % | Interest Rate | Total Interest Paid (30 Years) |
|---|---|---|---|
| 20% | 0% | 8% | $599,192 |
| 15% | 0.25% | 8.25% | $629,000 (+$29,808) |
| 10% | 0.5% | 8.5% | $659,368 (+$60,176) |
| 5% | 0.75% | 8.75% | $690,312 (+$91,120) |
Assumptions:
- Home value: $800,000
- Loan term: 30 years
- Base interest rate (with 20% deposit): 8%
With an 8% base interest rate:
- A 20% deposit results in $599,192 total interest paid over 30 years.
- A 15% deposit with a 0.25% low equity premium (8.25% rate) increases the total interest to $629,000 – a difference of $29,808.
- For a 10% deposit, the 0.5% premium raises the rate to 8.5%, totaling $659,368 in interest ($60,176 more than 20% deposit).
- With only a 5% deposit, the 0.75% premium raises the rate to 8.75%, resulting in $690,312 total interest paid – a substantial $91,120 increase over the 20% deposit scenario.
So at an 8% base rate, low equity premiums from 0.25% to 0.75% can add anywhere from about $30,000 to over $90,000 in additional interest costs over 30 years compared to a standard 20% deposit.
While low deposit options make home buying more accessible, the low equity premiums charged by banks can significantly increase the total interest paid over the life of the loan – often tens of thousands of dollars more for a 30 year mortgage.
When considering a low deposit home loan, make sure you do the math and take into account the long-term financial impact that low deposit premiums can have.
Some Banks Still Charge Lender’s Mortgage Insurance (LMI)
Most NZ banks no longer charge lenders mortgage insurance for over 80% lending, opting to charge the low equity premium (also known as low equity margin) fees instead. After all, if you could earn an extra $90k over the life of a loan vs a one off fee for an insurance premium, why wouldn’t you?
If you do come across a bank charging lenders mortgage insurance, understand that this is an upfront, one-time insurance premium that protects the lender if you default on the loan.
It is charged by some lenders when the loan amount exceeds 80% of the property value. It is an insurance premium that you pay for, that offers no benefit to you. It’s all to protect the bank.
The cost of LMI can vary widely depending on the lender, the amount of the loan, and the size of the deposit.
It’s usually a one-time fee that can be paid upfront at settlement or capitalised into the loan amount, which means it’s added to the total loan and paid off over the life of the mortgage.
Capitalising LMI will increase the total interest paid over the term of the loan.
Other Fees and Charges to Consider
- Application Fee: Many lenders charge an application or loan establishment fee, which covers the cost of processing your mortgage application. This fee can range from a few hundred to over a thousand dollars.
- Valuation Fees: Before approving a loan, lenders will often require a valuation of the property you intend to buy to ensure it provides adequate security for the loan. This fee generally covers the cost of a professional appraiser to assess the property’s value.
- Legal and Conveyancing Fees: These fees are paid to solicitors or conveyancers who manage the legalities of transferring property ownership. They can include searches, title registration fees, and other legal costs.
- Building Inspection Fees: It’s advisable to have a building inspection to check for structural issues, pests, and other potential problems with the property. This is an upfront cost that can prevent expensive issues later on.
- Ongoing Fees: Some loans come with ongoing monthly or annual service fees, which can add up over the life of the loan.
- Break Costs: If you have a fixed-rate loan and decide to pay it off early or refinance, you may be charged break fees. These can be substantial, depending on how much interest rates have changed since you fixed your loan.
Government Schemes for First Home Buyers
The New Zealand Government offers a helping hand through various schemes tailored to support first home buyers like you.
These are aimed at reducing the hurdles you might face when saving for a deposit. For instance, the First Home Grant provides eligible buyers with funds to use towards the purchase of their first home.
Kāinga Ora and First Home Loans
Kāinga Ora – Homes and Communities partners with selected banks to offer First Home Loans for those who might struggle to meet standard deposit requirements.
Typically, these loans require a smaller deposit—sometimes as low as 5%—which is significantly less than most lends. This can be the difference in making your dream home a reality.
Using KiwiSaver Towards Your Deposit
Your KiwiSaver savings can play a vital role in your journey towards home ownership.
You might be eligible to withdraw some of your KiwiSaver funds to put toward your first home. Coupled with a First Home Grant, this can make a significant difference in meeting lending criteria and making your deposit more affordable.
How Low Deposit Loans Affect Interest Rates
Lower deposit home loans generally result in higher interest rates for first home buyers compared to those with larger deposits.
Lenders view lower deposit home loans as riskier, since the borrower has less equity built up in the property from the start.
This increases the lender’s potential losses if the borrower defaults. To compensate for this higher risk, lenders tend to charge higher interest rates on low deposit mortgages.
For example, a borrower with a 20% deposit might qualify for a 2-year fixed rate around 6.75% from major NZ banks. However, if the deposit is only 10%, the rates jump to around 7.25-7.49% for that same 2-year term.
Canstar shows that floating rates for owner-occupiers with less than 20% equity can be as high as 8.84%, while those with more equity may get rates under 8%.
Westpac NZ advertises their “Special” 1 year fixed rate at 6.99% for borrowers with at least 20% equity, but 7.74% for those will less than a 20% deposit.
So across floating, fixed short and long-term home loans, major lenders consistently charge interest rate premiums of 0.5% to 1% or more for low deposit mortgages compared to loans with at least a 20% deposit.
This is before any additional low equity margin pricing adjustments.
While low deposits open the door to home ownership, the higher interest rates make homes more expensive for first-time buyers over the life of the loan.
Other Potential Risks and Catches With Low Deposit Loans
Risk of Negative Equity
If housing market prices decline after you purchase, it’s possible for your property’s value to drop below the remaining mortgage balance – a situation called negative equity.
This risk is amplified for buyers who made a small deposit of 10% or less.
In negative equity, you essentially owe more than your home is worth. This makes it very difficult to refinance to a better rate.
It also limits your ability to sell unless you can cover the shortfall between the sale price and loan settlement amount. Negative equity can ultimately trap homeowners in their mortgages until the markets recover.
Limits on Loan Portability
Some low deposit home loans may not offer full loan portability if you decide to move properties. Portability allows you to transfer your existing mortgage to a new property without having to get re-approved and pay discharge fees.
With a non-portable loan, you would typically need to pay a discharge cost of several hundred dollars to settle the old mortgage.
You’d then have to re-apply for a new loan on the next home, potentially at a different interest rate and with additional fees for establishment, valuations, etc.
This can add significant costs and hassle versus a portable loan that moves seamlessly between properties.
Inflexible Terms
Low deposit mortgages sometimes have fewer flexible features compared to loans that require more home equity. Examples could include:
- Inability to set up offset accounts or redraw facilities to reduce interest costs
- Limited extra repayment privileges without penalties
- No interest-only period options
- Less flexibility to split the loan into multiple portions (e.g. fixed and floating)
These flexibility limitations can reduce the ways borrowers can be smart about minimising their interest costs over the long run of the mortgage. More options to make extra payments or offset mortgage balances against savings can provide substantial interest savings.
Tips for Securing a Low Deposit Home Loan
The Impact of Your Credit Score
Your credit score plays a role in securing a mortgage. To improve your credit score, ensure you pay bills on time, reduce your credit card limits, and keep your debt levels low.
If you have a less than stellar credit history don’t despair. You still have options with non bank lenders.
Keep in mind you’ll pay a higher interest rate with a non bank loan, in addition to the low equity premiums.
Keep Your Employment Stable
Stability in your job reflects well on your loan application, as lenders value consistent and regular income. Typically, being employed in the same job for several months, or even years, will support your application.
Keep in mind there are income caps for some lending products, such as the Welcome Home Loan.
Reduce Your Debts
Before applying for a home loan, reduce any existing debts. This improves your debt-to-income ratio, a key measure lenders consider when assessing your loan application.
Be Disciplined With Saving
Showing you can save money consistently is essential. Regular contributions to a savings account can demonstrate to lenders your ability to handle ongoing mortgage repayments.
Use Available Government Grants and Schemes
There are government initiatives designed to help first home buyers. In New Zealand, incentives like the Kainga Ora first home grant can provide eligible buyers with up to $10,000 for a new home, assisting with the overall costs.
Tools like KiwiSaver and the First Home Grant can help boost your savings and contribute towards your deposit and other related costs.
Budget For Your Home Loan
Effectively budgeting for your home loan requires more than just accounting for the initial deposit.
You should factor in ongoing costs such as insurance, rates, and maintenance for your property.
Your budget needs to be realistic and consider future income and expenses to ensure you can maintain your loan repayments without undue stress.
Steps to Purchasing Your First Home
The pursuit of homeownership begins with a clear plan and a series of strategic actions:
- Determine your budget: Assess your finances to establish how much you can afford to spend on a property.
- Explore low deposit loan options: Talk to our mortgage brokers about your circumstances, and future plans. We can help explore lenders who best align with your needs.
- Get loan pre-approval: Obtain loan pre-approval from your chosen lender, which strengthens your position when making an offer.
- Start your property search: Engage with real estate sources to identify your ideal home, whether that’s a new build or a pre-owned house.
- Make an offer: Once you’ve found a suitable property, submit a formal offer in writing.
Conclusion
Low deposit home loans are a viable pathway to homeownership, especially for those who might otherwise struggle to save a traditional 20% deposit.
By understanding how these loans work, what’s required to qualify, and the risks involved, you’re better equipped to make informed decisions and plan your steps toward buying a home.
Our mortgage brokers provide a detailed list of all charges and fees associated with low deposit loans. We will help you understand exactly what your loan will cost you and help you make the best decision for your financial future.
Are you ready to explore your low deposit home loan options? Contact OneStop Financial Solutions today for a personalised consultation, and let’s map out your path to homeownership. Together, we can find a strategy that suits your financial situation and gets you into your new home sooner.
