How to buy property when you cannot save a big deposit

Property prices in New Zealand are once again on the rise. As prices rise, so does the amount needed for a deposit. Even with low interest rates, this makes entering the market more difficult.

Entering the real estate market is certainly difficult. There are, however, methods to make things a little simpler, such as taking advantage of government incentives, having your parents act as guarantors, or using a low deposit home loan.

If you have any of these choices, it may make all the difference and help you finally break into the housing market.

  1. Buy with a low deposit

When purchasing property, a 20% deposit is considered the usual. However, with real estate prices so high, it is just not a viable option for many first-time purchasers.

Many lenders provide house loans to customers with deposits of less than 20%. These low deposit home loans are frequently comparable to other loans with one exception: the maximum insured loan-to-value ratio (LVR).

Do not be confused by this technical mortgage phrase. The maximum insured LVR simply indicates how much you may borrow and how large your deposit must be. Most house loans have a maximum LVR of 80%, which means you may only borrow a maximum of 80% and will require a 20% deposit to receive the loan.

There are three things to be aware of when buying with a smaller deposit –

  • Lenders mortgage insurance premiums: If your deposit is less than 20%, your lender will charge you lenders mortgage insurance (LMI) on top of that. This safeguards the lender in the event that you are unable to repay the loan. It can increase the cost of your loan by thousands of dollars.
  • A lower deposit means you’ll have to borrow more: Buying with a modest deposit increases the amount of your loan. As a result of borrowing more, your repayments will be higher. It is the cost of entering the market more quickly.
  • Lenders will conduct a more thorough review of your application: Borrowers with a low deposit may have to work harder to demonstrate their ability to pay back. When you apply for a loan, lenders will thoroughly analyse your income and expenditure.
  1. Get a guarantor

If your parents own land, they could be able to assist you without charging you anything. If your parents agree to act as a house loan guarantor, they will effectively guarantee to pay back a portion of the home loan if you are unable to. This entails using their property as collateral for your loan.

This may seem risky, and it very well may be! However, if you are certain that you will be able to make your payments and your parents are agreeable, it is a possibility.

The guarantor option is not suitable for all property buyers. It entails having parents who are financially secure to some extent. You should also assess if it is worth the potential danger of entangling your assets with your parents in such a complicated way, but if planned right is sure an excellent option.

  1. Take advantage of government support

If you are a first-time home buyer, the income and property price limits for the First Home Loan and the First Home Grants programme has increased.

Borrowers who qualify for the First Home Loan scheme can receive a home loan with just a 5% down payment if their annual income is less than $95,000 for one person or less than $150,000 for two or more individuals purchasing jointly. These loans are sponsored by Kinga Ora and are available through partnering lenders (e.g., banks).

The First House Grants scheme provides first-time home purchasers with a lump-sum payment from the government of up to $5,000 for existing residences and $10,000 for new dwellings.

The First Home Grant has the same qualifying conditions as the First Home Loan, with the exception that you must also be a KiwiSaver member to obtain a first home loan.

If you have been a member of your KiwiSaver programme for at least three years, you can apply to withdraw your KiwiSaver funds to use towards the purchase of your first property. The three years do not have to be consecutive, as long as they sum up three years of contributions. For example, if you’ve been a KiwiSaver member for three years but had a six-month savings break, you won’t be eligible for the First Home Grant until you’ve contributed for another six months.

Deposit is a big part of the buying process, which is why careful planning is required beforehand to ensure that the loan application gets approved. We are skilled mortgage brokers with vast experience in lending across retail, business, commercial sector, so if there is anything stopping your purchasing your first home, let us help.

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