This is definitely one of the questions I hear most often so I decided to answer it in our blog.
I will divide my answer in 2 groups: deposit for your own home and for a rental property.
Deposit for your own home
The standard banks’ policy states that you need 20% deposit in order to raise the remaining 80% subject, of course, to other criteria such as your income, amount of consumer debt, a number of dependents, number of cars and your living costs. However, most banks have the capacity to lend up to 90% to 20% of their customers. Larger banks, therefore, will have more capacity to lend to low equity borrowers.
Chances are if you are someone with 20% deposit you are probably not the one asking this question. I always advise to my prospects and clients who are first home buyers that as a rule of thumb you should at least have a 10% deposit and your budget should be no more than around $650,000. Of course, there are exceptions. For instance, Last year I had a client who could buy her first home up to $900,000. I recommended against it as I knew the novelty of paying $1000 towards a mortgage on a $720,000 loan will wear out very soon. As Kendrick Lamar says in his song “Be humble” and do not extend yourself even if you think you can.
The reason why the banks do want ideally for you to have a 20% deposit is so that you can minimize the amount of mortgage to start off with. They kind of have a good reason; the lesser the balance of loan the lesser your repayments. Unfortunately, in reality, not many have $130,000 to put towards their first home.
Here are a few things I want you to consider if you are a person with a 10% deposit and a budget of $650k. Firstly, you will end up with a mortgage of around $585,000. That’s quite a significant amount to service. Your weekly repayment on a 30-year term and interest rate of 4.39% will be $675. When considering your application some banks will pressure test your ability to repay the mortgage is if the interest rate is nearly 8%. For example, the weekly repayment becomes $930 if the test you at the rate of 7.35%.
In order to qualify for a lower deposit, you need to compensate with higher income, smaller consumer debt and generally less of other commitments or liabilities. From my experience of crunching the numbers for hundreds of clients, a couple would be looking at a joint income of around $140,000, perhaps $10k worth of consumer debt, 1 car, 1 dependent. If you are single and want to buy a house by yourself then you would need to be on a six-figure income.
Where can the deposit come from?
Use the equity in your parents’ home. For more information watch a video here to understand how it works.
Use your KiwiSaver and also try to qualify for Home First Grant. The grant can give a couple a subsidy of up to $20,000 for a brand-new home. How much can you withdraw from your KiwiSaver? You can take out your contributions, employer’s contributions, returns generated and Government Tax contribution of $521 per annum. Basically, only a kick start of $1,000 needs to stay in. How soon can you withdraw the funds? After being a contributing member for 3 years.
How long does it take to save up $65,000? As a couple you can save this amount in around 4 years at comfortable pace.
Deposit for an investment property
If you are buying an existing or older property you need a deposit of 30%. The banks do have a capacity to lend 5% of their books to borrowers who have slightly smaller deposit.
If you are buying a brand-new property then you only need 20% deposit. However, we had a client last years who managed to buy a beautiful brand-new townhouse in Hamilton with only 15% deposit. If you are a high-income earner you can push your luck then a bit more. Unfortunately, you cannot use KiwiSaver funds as a deposit towards a rental property. I am personally of an opinion that it should change by the way.
So, in order to get into a rental property, you can use the equity in your own home if you already have one, you can use the equity in your parents’ home if this is going to be your first property purchase or you can use your cash savings.
We work with a number of clients who prefer to live in a property they rent but they put themselves on a property ladder by buying investment properties in more affordable cities such as Hamilton. That can be a very smart option as they keep the lifestyle, they want yet they also build their wealth.
Sales pitch: we help people get into investment property or their own home within 12-24 months by designed a very proactive program for them and giving them the right tools. If you want to know more read about Financial Coaching.