Buying below market value to renovate
In the last six months I've had numerous questions from first-home buyers who are eyeing up properties that are now available at a lower price due to their need for some tender loving care!
There are a number of factors we need to consider here to make the most of your deposit, your skills and any future uptick in property values over time, too so you can make the most of this opportunity.
The 90% LVR limit
First things first, it's important to understand that most banks won't lend beyond 90% of the purchase price of a property, regardless of what the valuation says.
There are some exceptions to this rule, such as the KiwiBuild First Home Loan, which allows for funding up to 95% for specific builds.
However, in most cases, you'll need to come up with at least 10% of the purchase price as a deposit to secure the property from a lending perspective.
How much can I borrow from the bank?
Let's consider a straightforward example I encountered recently, and a common question we get a lot from first home buyers.
Suppose you're eyeing a property with a purchase price of $500,000. You've managed to gather $50,000, combining your KiwiSaver and First Home Grant, and you've even been pre-approved to buy a place for up to $550,000.
Can you borrow the full $550,000?
The answer is no. The bank will base its lending on the purchase price of the property itself, which is $500,000.
Therefore, they'll lend you up to 90% of that amount, which equals $450,000.
The Registered Valuation is important
I'm often asked whether buyers can borrow more if the Registered Valuation comes in higher than the purchase price.
The answer is that the bank will generally rely on the lower of the purchase price or the valuation - so even if the RV is higher, the bank will take the lower value.
However this can work in your favour over time. If you purchase a property below market value and make some improvements, then have a new valuation carried out at least three months after purchase, the bank should rely on the new value.
Always check with your bank or mortgage adviser to ensure you meet the bank's requirements here.
Solutions to unlock renovation funds
One potential solution is to source additional funds for renovations after you've settled the property.
This could come from temporary financial support from family, an inheritance, or a loan.
Once you've made the necessary improvements and added value to the property, you can then get it revalued, possibly at a higher price, say $600,000.
This would allow you to borrow up to 80% of the new valuation amount, giving you access to more funds for your renovation project.
Every situation is different
When looking to renovate properties it's key to understand how banks attribute value initially, and how they'll look at improvements and increases in property prices over time.
All properties are different and it's a good idea to get advice specific to your situation, the property and the bank to make sure you're on the right track.
We're working with people every day, so get in touch with us to talk through your situation and make a plan for success!