A common question for buyers is “how much deposit do I need to secure a home loan?”
Depending on who you speak to, you may get different answers. You’ve most likely heard that 20% is ideal, but some circumstances require as much as 30% or as little as 5%. It largely depends on the type of property you intend to buy, i.e. owner-occupied, investment, or brand-new. Your level of consumer finance debt may also come into play.
For personalised advice about deposits, it’s recommended to speak with a mortgage broker. An experienced broker can help you make sense of the rules and restrictions and give you a good idea of how much deposit you will need. In the meantime, here's a quick overview of how deposits are generally assessed.
Deposits for investment properties
If you're looking to purchase an investment property – whether it's your first home, second home or tenth home – if you do not intend to live in it right away, then you'll need a 30% deposit.
The only exception is if you're purchasing a brand-new build or an off-the-plan property. In these cases, some banks will consider a 10-20% deposit, as the purchase of the property type is exempt from the Reserve Bank ruling.
The deposit doesn't necessarily need to be cash. If you own other properties, there may be equity which a lender could access as part of your deposit. Banks and financial advisers sometimes refer to this process as "releasing equity".
If you're purchasing your first home and intend for it to be an investment, you will lose the ability to use your KiwiSaver as deposit, and most banks won't allow the involvement of a guarantor.
Deposits for owner-occupied properties
There are different options available when you're looking at purchasing your first home as an owner-occupied property (meaning that you will live in it right away).
Based on the Reserve Bank ruling, ideally, a 20% deposit is required. This deposit can be the use of KiwiSaver, cash savings, gifting from family or involve a guarantor/springboard loan.
If you've owned a property in the past but don't currently own one now, and you didn't use your KiwiSaver in your previous purchase, you may still be qualified to use your KiwiSaver through the Second Chance Withdrawal process.
Owner-occupied property: low deposit option
Some banks may accept a deposit less than 20% if you intend to live in the property and you don’t own any other properties.
The trade-off of a low deposit is usually a high interest rate. You will likely pay a premium on your interest rate (a higher interest rate than what you may see advertised).
To accept low deposits, banks are required to meet a speed-bump condition set for them by the Reserve Bank. This speed-bump condition requires them to achieve a certain lending percentage threshold, which will then allow them to lend in the low deposit space (which is anything less than a 20% deposit).
Banks won't advertise whether they meet this condition to the public, but a good mortgage broker should have an idea of which banks do have the capacity.
What to expect when seeking approval for a low deposit
When you're looking at purchasing with a low deposit, other factors such as existing consumer finance debt play a large role in your ability to borrow.
- Banks will ask questions around your capability and appetite to debt.
- In most cases, banks won't allow you to add any consumer finance debt into the mortgage.
- For example, borrowers with $50,000 deposit but also $50,000 worth of credit card debt will find it hard to get a mortgage, even with a high household income.
Another factor banks don't generally disclose about low deposits is that they require portions of the deposit to have come from savings or KiwiSaver (generally 5% of the purchase price). This means that if you're planning on buying a $500,000 home with a $50,000 deposit that was given to you by family, you will likely get declined. But if you're receiving $25,000 from family and using $25,000 from your KiwiSaver, you're more likely to get approval.
Low deposits and new builds/off-the-plan purchases
The second option when it comes to purchasing with a low deposit is considering a new build/off-the-plan purchase. This type of purchase is once again exempt from the Reserve Bank's ruling.
Banks are generally happy to lend based on a minimum 10% deposit, and sometimes as low as 5% if you’re in a strong financial position. Like above, you will still be paying a premium on your interest rate. The same ruling regarding the level of consumer finance debt and a portion of your deposit having to be from savings/KiwiSaver will also still apply. However, you’ll have more finance and bank options available to you.
If you are aiming to buy with 5%, there will be an even higher premium on your interest rate and less lending options, but with a substantial income, it’s possible. Banks will ask questions to gain an understanding of why your deposit is on the lower side.
The First Home Loan
The last option to mention for those with a low deposit is the use of The First Home Loan (previously known as Welcome Home Loan).
In a quick summary, the First Home Loan is available to those who are buying their first home and meet an income and purchase price threshold. Currently, a couple purchasing together can't have earned more than $130,000 combined gross income in the past 12 months, and an individual purchasing on their own can't have earned more than $85,000 gross.
The house price cap is $650,000 for a new build ($600,000 for an existing build) in Auckland and $550,000 for a new build ($500,000 for an existing build) outside of Auckland. The main benefit of the First Home Loan scheme is to allow first home buyers to buy with a lower deposit without a premium added to their interest rates, which could end up saving them thousands.
Through the scheme, you can technically buy with a 5% deposit, but the banks' criteria of where the deposit is coming from and the amount of consumer finance debt you have, as well as affordability testing, will still apply.
For more detailed information about the First Home Loan scheme, please refer to this article by the Squirrel team: The First Home Loan, and how to get one.
In summary
These are some of the most frequently asked questions when it comes to how much deposit you need to buy a house. When you go into your bank – who may not have the capacity to lend in the low deposit space or isn't a lender of the First Home Loan Scheme – you may get a slightly different answer. Also, there could be a case of lack of knowledge around what other options may be available to you outside of your bank, depending on the staff's experience.
Our advice would be to get yourself a mortgage broker as they will tend to have a better idea on what's happening in the market.