Deposits, the current landscape
Along with how much can I borrow the number one question we get asked is how much deposit do I need to get into the home I want? The answer varies for a large number of reasons and with January's Loan to Value Ratio (LVR) restriction changes and the KiwiBuild reset we felt it was a good time to give a quick recap on the key numbers when it comes to deposits.
The required deposit can vary for many reasons including:
- The borrower: are they employed or do they work for themselves?
- The type of property: is it turn key, a new build or an existing property?
- The intended use: will it be an investment property or a family home?
- The lender: are they beholden to the RBNZ’s LVR restrictions or not?
First Home Buyers
One of the key groups impacted by any changes to deposit requirements are first home buyers.
We deal with many weary first home buyers who have been turned down by lenders based on deposit size who, until they talked to a mortgage adviser thought their home ownership dream was but a distant glimmering light at the end of a dark hallway because they didn't have a 20 percent deposit.
20 percent is often thrown around as the key number when it comes to buying an owner occupied property, and while a 20 percent or larger deposit comes with several advantages it's not a line in the sand by any means.
LVR’s restrictions and deposits
The LVRs restrictions were intended to reduce the banks exposure to low equity lending on the off-chance of a major downturn in the property market.
From January 1st 2019, the RBNZ changed the rules allowing banks to increase their proportion of low deposit or over 80 percent LVR lending from 15 to 20 percent of new lending, the rules differ for investment properties.
This improved the situation for first home buyers by making more capital available to those with smaller deposits.
There are several well publicised exemptions and recaped below but the focus on the RBNZ’s LVR restrictions around that 20 percent deposit mark created a strong perception that home buyers need to have at least that to purchase a property and this is not the case.
LVR exemptions recapped: While certain lending is exempt from the LVR restrictions lenders will still have their own lending policies to meet which will dictate the availability and cost of capital to the borrower.
- New building exemption: Loans to people building a new residence are exempt, this includes buying a residence within 6 months of completion from the developer. This applies to both owner occupiers and investors.
- Remediation exemption: Exempt if loan is used for remediation (e.g. weather-tightness issues), to bring a residence up to new building codes, or to comply with new rental property standards (for example, insulation). The exemption applies for both owner-occupiers and residential property investors.
- Welcome Home Loans: Renamed First Home Loan in the recent KiwiBuild reset.
- Bridging loans
- Refinancing: As long as the loan balance does not increase.
Buying with less than 20 percent deposit
Despite the LVR rules, it is possible to buy an existing property with less than 20 percent deposit.
The absolute minimum is generally 5 percent and there are quite a few strings attached once you start playing in the very low deposit zone, such as:
- Higher interest rates
- More compliance work, for example a borrower will require a valuation in most cases.
- Lenders will usually add a Low Equity Margin (LEM) which can be as high as 1% and this continues to apply until the borrowers equity position improves. There are some lenders who will offer discounts on this margin or even waive it at times.
- Borrowers are less likely to receive little bonuses like cash back offers.
I keep my finger on the pulse which banks have funding available in the low deposit space and can potentially get your customers pre approved with less than 20 percent deposit.
New builds are exempt for the LVR restrictions and a 10 percent deposit is realistic depending on the customers personal and financial position, while buying a turnkey property can be done with as little as 5 percent deposit, again if the rest of the criteria stack up.
At Loan Market we also work with the number of lenders who are not beholden to the RBNZ’s LVR restrictions, which means we can work on broader terms with your customers to find a home loan that can work for them under a range of different circumstances and deposit levels.
Kiwibuild changes and deposits
KiwiBuild the government's ambitious home building programme, implemented after the 2017 election, which aimed to build 100,000 affordable homes for first home buyers has had a reset.
After running into countless issues, the 100,000 home target was ultimately dropped and many of the other features have been rehashed, which has had an impact on the deposits first home buyers and second chancers need.
From the 1st of October the deposit requirement for the First Home Loan (formerly the Welcome Home Loan) has been reduced to percent.
First Home Loans are issued by selected banks and other lenders, and underwritten by Housing New Zealand. This allows the lender to provide loans that would otherwise sit outside their lending standards.
This means eligible first home buyers will be able to apply for a Welcome Home Loan with just 5% deposit and put their towards a KiwiBuild or other property.
When the LVR restrictions were first announced they were quite aggressively targeted at investors, due to the perceived growing housing market risks in this area. The bar was set at a 60 percent LVR meaning a 40 percent deposit was required to buy existing investment property with banks only being allowed to issue five percent of their new lending to buyers with a lower deposit.
There has been a softening of this over time first down to a 35 percent deposit and recently to 30 percent.
However at Loan Market through our broad range of lenders, many not beholden to the RBNZ LVR restrictions, we have options for lending up to 80 percent LVR. Investors can start building their portfolio from a 20 percent deposit. Lending criteria apply but if you have customers in this space it's worth putting them in touch and we can work through the eligibility criteria with them.
There are a variety of scenarios and situations that can also be supported, including
combining the equity in an existing property owner’s owner occupied home with a prospective investment property at an overall loan to value ratio of 80 percent at what have been quite competitive interest rates for our customers.
Overall there is a broad range of options when it comes to deposit size, it's not a one size fits all approach and it's worth getting your customers and clients to check with me before they downsize their ambitions based on the perception they don’t have enough of a deposit.