How much deposit do you really need?

You may have heard about the recent Loan to Value (LVR) restrictions imposed on banks by the Reserve Bank of New Zealand (RBNZ), but what does that mean for prospective home and investment property buyers?

The latest changes, which come into play on October 1, mean banks will only be permitted to lend up to 10 per cent of their total 80% and under loan portfolio or book.

These restrictions have been put in place to reduce the impact of a crash in the housing market of New Zealand’s economy. However, they’re likely to affect the amount of deposit you’ll need if you are looking to purchase a property.

If you’re a first time home buyer and have a deposit of 20 per cent or more, the new restrictions won’t affect your loan application. However, if you have a deposit of less than 20 per cent, the changes will affect you. For example, if you’re looking to buy a $300,000 property, but only have a deposit of $45,000 (15 per cent), you can expect your application to be subject to a number of assessments before approval. It’s not a lost cause but your application will be under more scrutiny that in the past. It’s also worth bearing in mind that a deposit of less than 20 per cent will mean you will likely need to pay Loan Mortgage Insurance on top of your deposit or a Low Equity Interest Rate margin, on top of your chosen interest rate.There are exemptions to this rule if you are building a new home.

Residential property investors who have a deposit of less than 40 per cent, or not enough equity in existing investment or owner occupied property, will find it harder to have their loans approved, although there are some exemptions to the rule, such as lending to finance new home constructions.

Each bank’s suitability criteria will vary, and acceptance of your loan will be dependent on what other low-deposit lending commitments the lender may have. It’s still possible to find a lender who is prepared to offer you a low deposit loan, and an adviser will be able to help you shop around and explore all the options that are available to you.