If you are an aspiring homeowner, then you will need to know if you really need a 20% deposit to buy a property.
The short answer is no, but it certainly helps.
A 20% deposit is the traditional ‘gold standard’ but it’s important to understand why and what your options are if you’re not quite there yet.
Why The 20% Deposit Is Important
In the eyes of the Lender, having a 20% deposit positions you as a lower-risk borrower. It also helps as it unlocks tangible benefits:
- Access to Better Interest Rates
- No Low Equity Fees
- Lower Monthly Repayments
- More Financial Flexibility.
Currently, Banks are also restricted by the Reserve Bank on how much they can lend to borrowers with less than 20% deposit, making these loans harder to obtain.
What if Your Deposit Is Less Than 20%
If your deposit is under 20%, you’re considered a ‘low equity’ or ‘low deposit’ borrower. This then means there are a different set of rules and challenges:
- LVR Restrictions: Banks have a strict quota and can only allocate a certain percentage of their new lending to low-deposit borrowers. This creates fierce competition for limited funding.
- Higher Costs: You may face slightly higher interest rates and will almost certainly have to pay a Low Equity Fee (LEF). This is a one-off fee or an ongoing margin added to your interest rate, designed to cover the Bank’s increased risk.
Key Options for Low-Deposit Buyers
First-time buyers can access dedicated schemes to help borrowers get on the ladder sooner:
- The First Home Loan (Kainga Ora): This offers eligible buyers to purchase a home with as little as a 5% deposit. It comes with specific income caps, but it’s a powerful option if you fit their criteria.
- KiwiSaver Withdrawal: If you’ve been contributing to KiwiSaver for at least three years, you may also be eligible to withdraw most of your KiwiSaver to use towards a first home purchase.
Navigating the criteria for these schemes can be complex, so getting advice early is essential.
How To Boost Your Deposit
Saving for a deposit can feel like a huge challenge, but a clear strategy always helps. Here are some tips…:
- Create A Simple Budget: This helps to see where your money is going. Then for any potential surplus, set up an automatic transfer to a high-interest savings account on every payday. Making savings non-negotiable is the fastest way to build your deposit.
- Eliminate High-Interest Debt: Lenders look at all your existing debts. Focus on paying off high-interest loans, like credit cards and personal loans, as this improves your borrowing power and frees up more cashflow for saving.
- Checkout Family Financial Support: A gift or loan from family can be a massive help. It’s important to document this correctly with a formal gifting declaration or a loan agreement, as this ensures it meets the Bank’s requirements and protects everyone involved.
- Explore Co-Ownership: Teaming up with family or friends to pool your deposits together is a modern and increasingly popular strategy. With a solid legal agreement in place, co-owning can get you onto the property ladder years sooner than if you try to do it alone.
Strategy is Key!
While aiming for a 20% deposit is a smart financial goal, it’s not the only way to achieve homeownership. The right path for you depends entirely on your situation.
An experienced Mortgage Adviser can help you create a personalised roadmap – whether that’s a plan to reach a 20% deposit faster, or a strategy to navigate the low-deposit lending landscape with confidence.
Summary
By working with a knowledgeable Mortgage Adviser at iLender, you can rest assured you will be provided with invaluable insights and guidance. We can help you evaluate your options and make informed decisions tailored to your specific circumstances.
Please feel free to reach out to us if you need a hand, so we can help to find the best solution for your situation. Simply pick up the phone and call 0800 LENDER (536337) or email to [email protected] and we will be delighted to be your Mortgage Adviser of choice.
