Struggling to save up for a house deposit? You’re not alone. Buyers across the country are feeling the effects of a booming property market, with the latest real estate figures showing that the median house price increased more than 25 percent over the past year to a record high of $826,000.
But all is not lost! While saving up for the traditional 20 percent deposit is a big ask, the good news is that there are other options available. In this blog post, we’re going to explore some strategies you can use to secure a home loan without saving up for a huge deposit.
Why the banks want a big deposit
Simply put, banks require a large deposit to reduce the risk associated with providing home loans. To better understand this, let’s take a quick look at loan-to-value ratios (LVRs).
An LVR expresses the ratio of a loan to the value of an asset purchased – in other words, the size of your loan compared to the value of your property. For example, if the house you want to buy is worth $500,000 and you have a deposit of $100,000, you’d need a home loan of $400,000, which would make your LVR 80 percent.
Currently, most bank lenders require an LVR of 80 percent or less, meaning most borrowers need a deposit of 20 percent or more. Loans with an LVR of more than 80 percent are considered low-deposit home loans.
How to secure a home loan without a 20% deposit
1. Low deposit home loans
A low-deposit home loan is exactly what it sounds like – a home loan for borrowers with deposits of less than 20 percent of the property’s value. As it stands, only 10 percent of a lender’s mortgage lending can be low-deposit home loans.
Lenders have much more stringent criteria for low-deposit home loans than regular home loans, so it’s crucial to prepare your application accordingly. Here at iLender, we have extensive experience with high LVR mortgages. Our impartial mortgage brokers can provide you with expert advice to help you make your application as attractive as possible and maximise your chances of securing a low-deposit home loan.
2. First Home Loan
If you’re a first home buyer, a First Home Loan can be a smart way to get your foot in the door. Supported by Kainga Ora, the First Home Loan initiative enables first home buyers to secure a home loan with a deposit of just 5 percent. There are certain eligibility requirements, including income caps and regional house price caps, so be sure to talk to your mortgage broker for more information.
KiwiSaver isn’t just for retirement. Once you’ve been a KiwiSaver member for three years, you may be able to withdraw most of your KiwiSaver savings to put towards a deposit on a house, provided you’re a first home buyer (or are in a similar financial situation as a first home buyer) and you’re planning to live in the property as your main place of residence.
Depending on your circumstances, you might also be eligible for a First Home Grant, which provides first home buyers with up to $10,000 towards a deposit on your home. If you’re buying a property with someone else, both parties may be able to use their KiwiSaver and First Home Grants.
4. Family guarantee/gift
Depending on your family circumstances, a family guarantee may be an alternative to saving up for a deposit.
With a family guarantee, a close family member uses the equity in their home to provide security for your loan. All parties require independent legal advice and only a few lenders will consider this option. In iLender’s opinion it is a last resort and the family member will be required to understand that they are responsible for all or some of your debt.
Family gift, otherwise known as ‘the Bank of Mum and Dad’, is extremely common because not only is there a limit to the family liability (the amount of the gift), there is no link back to their property and they are not in anyway responsible for your debt.
Banks have no issue with this as a source of deposit.
Contact the low deposit home loan experts
Breaking into the property market isn’t easy – but it is possible.
Here at iLender, we work with a broad range of industry-leading lenders to help you find the best home loan for your specific circumstances. Our expertise enables us to provide high LVR mortgages at very competitive rates – perfect for low-deposit first home buyers and investors with modest equity deposits.
To learn more about our services and discuss your options, give us a call today on 0800 536 337.