How much can I borrow? It’s a question many first home buyers (FHBs) want to know, and understandably so.
When borrowing money for your first home, it’s not as simple as subtracting a deposit from the purchase price. Banks aren’t willing to take whatever money you have and fill in the rest.
Not only are there restrictions on how much a bank can lend you, but there are also specific affordability criteria to meet. So, what does that mean for you and how much you can borrow? Canstar guides you through everything you need to know.
What factors determine how much I can borrow?
There are two main factors that determine how much you can borrow for a home loan:
- How much you can afford to borrow
- How much the a financial institution is willing to lend
Lenders need to ensure that you can afford your remortgage payments and still maintain a reasonable standard of living with your remaining income. However, they also face restrictions on how much they can initially lend you.
How much can I afford to borrow?
Banks are required to assess affordability under responsible lending criteria, but they also do it to safeguard their interests. After all, if you default on your loan, they stand to lose money.
To determine affordability, banks must evaluate whether you can comfortably repay your loan while still covering your day-to-day expenses, leaving some funds available.
Currently, there is no uniform legislation governing loan affordability. Each bank has its own set of criteria. However, many banks have started implementing a debt-to-income (DTI) ratio to determine the required deposit for a home loan.
What is a debt-to-income ratio?
A DTI ratio measures how much you want to borrow against your income. For example, if you earn $100,000 a year, and you apply for a home loan of $500,000, the DTI ratio is five times your income.
Currently, there is no set framework around debt-to-income ratios in New Zealand. But, the Reserve Bank has been mulling over the possibility of introducing one. In saying that, lenders are able to use DTIs of their own, should they wish to. In recent years, both BNZ and ASB have used debt-to-income ratios to guide their lending (at around six to seven times income). However, to what extent DTIs are still in use is unclear.
How do banks determine affordability?
Banks typically look at your uncommitted monthly income (UMI) or debt service ratio (DSR). While these are calculated differently, they more or less look at the same thing: the amount of disposable income you’re left with once your bills, living expenses and hypothetical mortgage payments are accounted for.
The lender will have a fixed dollar amount, or percentage, that you must meet.
As a part of this, your income will be tested against a range of mortgage rates. So even if interest rates are around 4%, your bank could calculate your UMI based on a mortgage with an interest rate of over 7%. Currently, some banks are stress-testing mortgage applicants as high as 9%.
This is done as a safety measure, to ensure you don’t fall into financial hardship should mortgage rates increase.
Compare home loans with Canstar
If you’re in the process of securing finance, you must always shop around to get the best deal. Which is where Canstar can help.
The table below displays some of the 2-year fixed-rate home loans on our database (some may have links to lenders’ websites) that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.
How much is a bank allowed to lend me?
The other side of the coin is how much a bank can actually lend you. You may be able to afford your mortgage repayments, but you still need to pay for part of the property yourself. As banks are unlikely to give you a 100% home loan.
These are called the loan-to-value ratios (LVRs), and are set by the Reserve Bank.
What is a loan-to-value ratio?
An LVR is the size of a loan compared to the value of the property. Or, what percentage of a property’s purchase price is met by the loan.
For example, if the home you want to buy is worth $1 million, and you have a $300,000 deposit, then you’d require a $700,000 loan to purchase the property. This would mean 30% is coming from you, and 70% from the bank, or an LVR of 70%.
Generally, a bank can lend up to 80% of a home’s value. Meaning you’ll need at least a 20% deposit, $200,000, for the million-dollar property mentioned above.
However, there are some exceptions to this rule.
Banks are able to lend a certain portion of their mortgages to people with low deposits. Currently, lenders are allowed to lend beyond the LVR of 80% for up to 15% of their mortgages.
To be one of the lucky few to secure a low-deposit loan, you need to be seen as a minimal risk. This means cutting back on as much non-essential spending as possible, so lenders can see you live well within your means and have plenty of uncommitted monthly income to spare.
New build exemption
Loans to those building a new home are exempt from the LVR rules. If you buy at an early stage of construction, or buy from a developer within six months of completion, the LVR rules will not apply to your loan application.
Currently, NZ is building a lot of smaller townhouses and apartments. For first home buyers, new homes such as these are a more affordable option, and buying off the plans will exempt you from the LVRs.
Government assistance and other options
If you can’t muster a 20% deposit, have you thought about government assistance? The First Home Loan is a financial support program offered by Kāinga Ora. Most lenders currently require a minimum 20% deposit for a home. But with a First Home Loan you only need a 5% deposit. This is because Kāinga Ora underwrites the loan, allowing lenders to provide loans that would otherwise sit outside their lending standards.
Some non-bank lenders offer their own unique products to help FHBs, such as Squirrel Launchpad.
How much can I borrow?
As outlined above, there’s no set formula to determine exactly how much a person can borrow. Formal DTIs are still a work in progress, the LVR restrictions have exemptions, and all banks assess affordability differently.
But, as a general rule, you can borrow up to 80% of a property’s price, as long as you can comfortably meet the repayments. And if your finances are good, you may even be able to borrow up to 90%.
If you want a personalised estimate of how much you could borrow, check out Canstar’s free Home Loan Borrowing Power Calculator. It will show you what a financial institution may lend you, based on your income and expenses.
To learn more, and to start comparing home loans, just click the link below:
About the author of this page
This report was written by Canstar Content Producer, Caitlin Bingham. Caitlin is an experienced writer whose passion for creativity led her to study communication and journalism. She began her career freelancing as a content writer, before joining the Canstar team.