What to do if you have less than a 20% deposit for a house

Low deposit? No deposit? You might think you’re fat out of luck when it comes to buying a house. But don’t throw in the towel just yet. In this Canstar guide, we’ll explore what you can do to get around the LVR rules and claim your piece of real estate.

LVR restrictions –  which determine how much lenders will let you borrow towards a house – were introduced in 2013 to cool down an overheated property market in New Zealand. While good in theory, the other side of the argument is that it makes the situation that much harder for would-be first home buyers. It can also make it harder to purchase an investment property. So are there ways around the pesky LVR rules? The good news is there are some steps you can take to increase your chances of securing home loan approval. Canstar explores …

What is LVR? 

LVR, or loan-to-value ratio, is the amount a bank lends for a house against the price of the property itself, in a percentage form. So, if you put down a deposit of 20%, then the loan-to-value ratio is 80%. These restrictions provide a buffer in the face of a recession, which would particularly affect home owners and investors with large debts.

The Reserve Bank of New Zealand (RBNZ) introduced LVR restrictions in October 2013, preventing banks from lending more than 80% of the value of a home. Since then, RBNZ has eased the LVR rules slightly. At the time of writing, up to 20% of a bank’s new lending to owner-occupiers can be for low-deposit loans (buyers with deposits of less than 20%). This change took effect on January 1, 2019 – prior to that, banks could only lend 15% of their new lending to home buyers with deposits of less than 20%.

Below, we take a look in more detail at how to make the most of the LVR easing, as well as how to get around the LVR rules.

Banks can accept less than a 20% deposit:

The Government is investigating the use of debt-to-income ratios in New ZealandEven with RBNZ’s 2013 announcement restricting loans to buyers with deposits of less than 20%, banks have still been able to lend low deposit home loans; it’s the volume of banks’ low-deposit loans that has been restricted.

So, it pays to shop around to see which banks are prepared to issue loans to buyers with smaller deposits.

Regardless of deposit levels, borrowers still have to go through assessments before their loan applications are approved. So make sure you do your homework on lenders’ criteria, too.

To see a snapshot of the current low-deposit home loans on offer on the Canstar database, you can see the table below, which is sorted by the maximum loan to value ratio of each loan (highest to lowest). Please note, 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, you can use our free home loan comparison tool here.

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First Home Loan

If you only have enough for a 5% home deposit, the First Home Loan, supported by Kainga Ora, could help you to get a foot in the door. A First Home Loan allows first home buyers to put down a 5% deposit. Just keep in mind, there is a cap on the amount you can borrow, as well as the amount you can earn, so take a look at the eligibility requirements here. Although Kainga Ora underwrites the First Home Loan, it’s actually issued by selected home loan lenders. So, make sure you check whether lenders offer it and whether you meet their criteria. 

Here are the key criteria for First Home Loan eligibility:

  • Income cap: You can have a maximum yearly income of up to $85,000 (before tax) for one person. Or a combined maximum yearly income of $130,000 (before tax) for two or more people.
  • Minimum deposit: You will need a minimum 5% of the purchase price of the house you want to buy.
  • House price cap: The price of the house you are buying with a First Home Loan must be less than the regional house price cap.
  • First home buyer: You must be a first home buyer or a previous home owner in a similar financial position to a typical first home buyer.

Housing association support 

Housing associations such as the New Zealand Housing Foundation allow you to buy part of a house but live in the whole dwelling. Similar to owning the house outright, the deal is rent-free. You organise your mortgage with a standard home loan lender with support from the Housing Foundation. Ownership is shared with the association until you have the money to buy the whole house. This system offers some flexibility because you can increase your percentage of ownership whenever it suits. And, if you need to break from the deal, you can sell your share in the house. Better yet, there is no fee on the share that the housing association owns. The Housing Foundation support arrangement is a great way to own equity if you don’t have the money to buy an entire home. 

Don’t know where to start in picking a home loan lender? Use our free rate comparison tools, below: 

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KiwiSaver first home withdrawal 

What happens if I make a withdrawal from my online bonus savings account?

If you’re putting KiwiSaver funds towards buying a house, you still need a deposit of 20%. But the good news is that you are allowed to withdraw your own savings, employer contributions and government contributions (formerly known as member tax credits).

If you meet the criteria, first home buyers can also access a HomeStart grant. Here’s how the grant works and the eligibility criteria: 

  • If you’re purchasing an existing home, the HomeStart grant can give you between $3000 and $5000. Each thousand represents a year of contributing, so you have to have been a contributor for at least three years.
  • If you’re building or buying a new house, then the HomeStart grant doubles to between $6000 and $10,000.  

Be mindful of the housing price caps and incomes caps, though. You must earn less than $85,000 a year as an individual, or under $130,000 a year as a couple, to be eligible for a HomeStart grant.

Mum and dad or inheritance

In the past, there was a stigma attached to calling on the bank of mum and dad. But, in today’s economic climate, it’s definitely become a more widely accepted way of financing a home. If you’re lucky enough to have parents who are in a position to help you with a deposit, it’s an opportunity hard to pass up. Just be aware that many banks will still require evidence that you have saved at least some of the deposit yourself. This is because if you’ve not been able to save anything towards a deposit, lenders will be concerned about your ability to meet your mortgage repayments.

Mortgage brokers

Mortgage brokers know how the home loan system works and which banks are willing to approve low-deposit home loans. They might even be able to give you tips on how to get around the rules concerning saving a deposit. What’s more, they can also plead your case. Just remember that there is no such thing as a free lunch. Brokers act on behalf of lenders, so they may only show you products from a small number of providers. This means you may not get a fair idea of the range of products available. If you want to compare home loan products, you have come to the right place. Canstar researches, rates and compares home loan products, to give you a snapshot of what’s happening in the market.

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New home builders

New homes are exempt from the RBNZ’s LVR restrictions. This is a bit of a double-edged sword, as new homes tend to be more expensive than existing homes. But it’s good for people in the market for a new build, especially one of the many new townhouses popping up around the country. 

The final word on getting around LVR rules

Finally, beware of what you wish for. If you borrow more than 80% of the value of a home, you can be subject to a hidden cost called a low equity premium (AKA lenders’ mortgage insurance or mortgage indemnity insurance). If you can persevere and keep saving, it may be worth it to avoid this extra fee. 

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