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Why your borrowing power is less when you have less than 20%

We love working with first home buyers. The excitement of walking through your own front door for the first time is something that never gets old. 

After more than 15 years combined experience between us, there is one thing that keeps coming up over and over - why can’t I borrow as much if I have less than 20% deposit?

While there are much publicised rules around how much banks can lend to people with less than 20% deposit, there are also lesser known requirements around income, current debt, and credit history which also have to be met for you to borrow a higher percentage of the property’s value.

Take Tom and Chloe for example. They earn $44K and $50K respectively, and they want to buy in Matamata for $450K. They have a current car loan of $10K which they are repaying at $100 / week. They have some KiwiSaver and savings which total $45K, 10%. 

The bank wants to see that Tom and Chloe can easily afford to make their loan repayments, even if their interest rate is higher. So they require Tom and Chloe to have at least $1000 / month available after all their expenses have been met.

This means that Tom and Chloe will have to lower the amount they borrow, being $300K rather than borrowing $405K, and they’ll only be able to afford to buy a house for $345K rather than $450K.

Then Tom receives an inheritance from his grandmother of another $45K, so they will have a total of $90K in deposit. Now they have additional deposit, the bank is happy for Tom and Chloe to have $200 / month extra after their expenses are repaid. So they can now borrow $360K and buy their house for $450K.

Your borrowing ability with a lower deposit is therefore linked to your income and also any additional outgoings you currently have. So therefore your borrowing power is less if you have less than 20% deposit. 

Always talk to us about your situation. We’re happy to help make a plan tailored to you, and often have ways in which we can increase your borrowing power if necessary, even with a lower deposit.

Adam, Claire & the My Mortgage Team.