Can you get a home loan with no deposit? You want the good news, or the bad new? The good news is, yes, you probably can. However, now for the bad news! For a lender to give you a mortgage with no deposit, you’ll need somebody with pockets as deep as Jeff Bezos or Graeme Hart to be your guarantor.
In New Zealand, it’s never been easy to find an institution that will lend 100% of the purchase price of a home. Until recently, the loan-to-value ratios curtailed low deposit lending. And now, the current economic climate means that while the price of credit is historically cheap, the banks are particularly adverse to any risk.
But while you’re unlikely to be given a mortgage without any deposit at all, don’t despair. For even if you’ve not been able to save a big deposit, there are still options available:
The Bank of Mum and Dad
Even if you’re not related to Jeff or Graeme, you might be able to call on The Bank of Mum and Dad. If your parents have enough equity in their home, they could use that to provide your deposit, or co-sign your loan as a guarantor. And if your parents are sufficiently loaded, you could well borrow up to 100% of a property’s value.
But asking to tap into your parents’ money is not a request that should be made lightly. If you fail to meet your mortgage repayments, they become liable. They could lose their home, too, if things go badly wrong. And if that happens, family ties could become fractured.
For more on the pitfalls of parental assistance, check out our story: Buying A First Home? The Bank of Mum and Dad Can Help!
Low-deposit home loans
Although lenders aren’t likely to approve loans for 100% of the value of a home, most have the capacity to lend up to 95% of a home’s value … IF!
And some of the big IFs attached to this include:
- IF you can prove that you have a solid financial head on your shoulders
- IF you have a spotless credit history and credit rating
- IF you have a good, steady job
- If you can prove that you live within your means and know how to save regularly
However, low-deposit home loans do come with a catch. Lenders will often charge a premium on top of their normal interest rates, either as an ongoing levy or as a one-off fee. For more on the subject, check out our story: Low Deposit Home Buyers Beware of the Low Equity Premium.
Or your lender might require you to take out lender’s mortgage insurance. The policy covers the lender for any losses it might incur if you default on your loan. Premiums are usually just added to the cost of your loan.
If you are considering a low-deposit loan, you might be better off delaying you aspirations of home-ownership until you can save a bigger deposit. For, in the long run, it could secure you a cheaper loan and save you tens of thousands in interest payments.
Use your KiwiSaver
As a way to save for a first home, KiwiSaver is a great tool. So is the KiwiSaver First Home Grant, which can give you up to $5000 for a existing home, or up to $10,000 for a new build. But both the KiwiSaver first home withdrawal and the First Home Grant have their limitations. These include:
- If you’re planning to use your KiwiSaver to put towards buying a house, you’ll still need enough funds to qualify for at least a low-deposit home loan
- You can’t use a KiwiSaver first home withdrawal for the initial deposit when buying at auction
- You can’t use the HomeStart grant for a deposit, as it’s only paid on settlement
For more information on using your KiwiSaver to get into a first home, check out our story: KiwiSaver First Home Buyers Withdrawal: 14 Useful Steps.
First Home Loan
A First Home Loan is a special home loan for first home buyers, which only requires a 5% deposit. Welcome Home Loans are underwritten by Housing New Zealand (a government corporation) and are issued by several lenders. These include: Westpac, TSB, Kiwibank, The Co-Operative Bank, and the SBS Bank.
However, as with the First Home Grant, First Home Loans do come with strings attached:
- There are strict price caps on the properties it applies to. These range between $400,000 and $650,000 and vary region to region and whether you’re purchasing a new or existing home
- You need to pay a 1% lender’s mortgage insurance levy, which can be built into the loan
For more information on the First Home Loan scheme, check out the Kāinga Ora website.
Using a personal loan to fund your home loan deposit is technically possible, but it’s not a common or easy method for buying a home.
You’ll need to prove you’ve an income high enough to repay both a personal loan and a mortgage. Plus you’ll need a spotless credit history.
While it may be possible to find a lender who will accept a personal loan as a deposit, you’ll certainly be charged higher interest rates. And, if you’re earning enough to qualify, it’s unlikely that you’ll need to resort to this option in the first place.
Are home loans with no/low deposit a good idea?
It goes without saying that the bigger your deposit, the easier (and cheaper) it will be to buy your first home. And there are negatives to purchasing a home with a small deposit:
If you’ve a smaller deposit you can face:
- Higher interest rates, if you borrow more than 80% of the property’s purchase price
- Low equity premiums or lender’s mortgage insurance
- Lengthy and more difficult approval process
- If house prices fall, you could find yourself in negative equity sooner
- Putting undue financial pressure on family members if they act as guarantors
However, saving for a deposit can be hard and, on the flip side, there are benefits from pursuing home ownership with only a small deposit:
- You save money on rent, which goes towards paying somebody else’s mortgage
- The added security that comes with home ownership
- You get to enjoy any capital gains made from rising house prices
- Interest rates are at historic lows, even with low equity premiums or lender’s mortgage insurance on top
Ultimately, your decision should be based on research, expert advice and your own financial situation. For regardless of the size of your deposit, as long as you can comfortably afford your mortgage repayments, there’s no reason why you can’t make the move into a home of your own.
Canstar is here to help
If you are in the process of saving for a first home, it pays to keep on top of the current interest rates in the market. And Canstar is here to help. Below is a snapshot of the current low deposit home loans on offer on the Canstar database, sorted by the maximum loan to value ratio of each loan (highest to lowest).
Please note that this table is generated based on a loan amount of $350,000 in Auckland for a first home buyer. If you’re interested in comparing further, just click on the button at the bottom of the page.
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