How much deposit do we need?
We talk to people all the time who have done a great job of keeping their student loans low, their existing debt minimal and have a good steady income who are looking o buy a house. They’ve also been contributing to their KiwiSaver and saving often as well for their deposit. They come to us and they have somewhere from 10 - 15% deposit needed to buy a house they are looking at. Great. Banks are able to lend for the purchase of a house when you have a 10% deposit so we can do something for you.
We do often get asked though, is it better to wait and get a 20% deposit before we buy though?
Now this is an interesting question and there are a few elements to it. First lets look at the benefits of having a 20% deposit.
- It is easier for the banks to lend money when you have a 20% deposit. This is due to the Reserve Bank putting restrictions on banks in the amount of their overall lending they can give to people who have less than 20% deposit. These are called the Loan to Value Ratio Restrictions. You can read more about them here.
- It can be a little more expensive to borrow money when you have less than 20% deposit. Different banks have different ways to do this. It is ether by adding a Low Equity Margin (LEM) or a Low Equity Premium (LEP). The Low Equity Margin is where the bank charges a slightly higher interest rate for people with less than 20% deposit which is somewhere between 0.6% - 0.9% on top of the rates you’d see advertised online or on TV. The Low Equity Premium is a one off cost the bank charges. Again this varies per bank and the size of your lending but might be a few thousand dollars. Sometimes this can be added to you loan. The best thing about the LEP is that you get the best rates from the bank moving forward.
However, there is another side to this...
The flip side to waiting until you have a 20% deposit are many:
- How long is it going to take to get to a 20% deposit? It may have taken you 3 or 4 years to get to a 10% deposit so it pays to realistically look at how long it will take to get to a 20% deposit. Also, once you do get to a 20% deposit, take into account if house prices have increased, your 20% deposit may not be 20% of what the value of that property is now worth.
- Will you miss out on the house you’ve found if you wait? Sometimes you found the property that has everything you need in a first home and is in the location you are wanting. If you’ve been looking for a little while, you may realise that the “right property” doesn’t come up all the time. Waiting till you get a 20% deposit may mean you miss out on the property you’ve found or the area that you are wanting to live in as there might be not as many properties on the market in future in that location.
- What will the capital gains be during this time be? This is the big one for us, waiting means that things may get further out of reach. We’ve recently been through a period of huge growth but even in a semi flat property market, house prices can go up 3 or 4% a year easily. If that’s the case, in the time it takes to get to a 20% deposit, the houses you can afford could have gone up 10%+ which could be $40K - $60K on a lot of first homes.
Time for some maths
If you were looking to buy a property for $500K and you had a $70K deposit, lets look at some situations and what they say about whether to use the less than 20% deposit or wait till you get to 20%.
Simply, a $430K loan for the property, with a low equity margin on the interest rate means that your weekly repayments would be $473 rather than $421, so an extra $50/week.
Let’s say it takes you an extra 24 months to save the $30K needed to get to 20% deposit. In 24 months of owning the property, you’d have paid an extra $5200 in interest, but you’ve also paid $15K in principal so your loan is lower already.
That’s also not taking into account that over the 24 months, even with inflation levels of price increases (3%), the property would be worth over $530K meaning your deposit would need to be $106K and your loan would be $424K.
At the same time, if you’d purchased previously, your loan would now be $415K and because of your gains in value (plus other improvements you may have been able to do to the house over the 2 years), your equity in the property is now @ 22% so you are further ahead as well.
So what’s the conclusion?
In our view, it is generally better to get into a property as soon as you can, taking into account all the factors which we will walk through with you, but if in the end you want to wait until you have a 20% deposit, great! We’ll help get a plan in place for you and check back in as you go to make sure you’re ticking along.
If you want to go ahead with a deposit less than 20%, whatever it is) we can get an application underway for you and either get a pre approval or, when you find a house to make an offer on, get an approval for that for you.
One other thing to note, if you have saved in savings or KiwiSaver a deposit and it’s not quite 20% you can be gifted funds from family to get to that 20% which means you get access to those lower rates and fall outside of the banks other low equity restrictions. This is a great option if you have it available. Speak to the team at My Mortgage about gifting options.
We can help, regardless of your deposit
Whether you re looking to see if you’re eligible for the Government’s First Home Loan with a 5% deposit, or you have one where between 10%-20% deposit, or you have over 20%, we can help get things progressing for you. If now’s not the right time for you, let’s make a plan. If now is the right time, let’s get a approval.
Easy as that.
We’d love to chat through your options so touch base online or give us a call and Greg, Adam or Claire would love to go through things with you.