How much deposit do I need for my first home in 2020
I have less than 20% deposit, is it enough? There seems to be a lot of misconceptions on how much deposit you really need to buy a first home in New Zealand, especially in Auckland. A lot of the advertisements you read online, watch on TV or listen to friends who have recently bought their first homes. Is it 5% or 10% or in some cases 0% deposit? Then you hear people saying you need 20% deposit.
How am I going to save 20% for a home in Auckland? Seems like an impossible task. I’m going to breakdown the reality what deposit you really need and the 3 hidden costs on having a low deposit (meaning less than 20% deposit).
Loan to Value Ratio - LVR
This is a big buzz word around the media and when people talk about it. What does it really mean? Simply put it’s the deposit. The Reserve Bank of New Zealand (RBNZ) had set restrictions on what sort deposits are required for different purposes. For example, if you’re buying a first home known as owner-occupied with the banks then ideally you should have a 20% deposit i.e. 80% of banks lending are to be within this range. If you’re an investor i.e. you would have to have 30% and each bank would have a limit on how much ‘investor’ lending they can do.
But this all changed when Covid-19 hit the economy. One of the major reasons why RBNZ put LVR limits in place was to cool the housing market as the values of property were increasingly at a rapid pace. So RBNZ implemented these limits around 2013 and then adjusted them accordingly.
So, let’s look at numbers on what this actually means. Let’s say a couple who wants to buy a property for $1,000,000. The ideal deposit is 20%, therefore the couple would need to have $200,000 and the bank will lend 80% of the value i.e. $800,000.
The truth is that you can buy a property with less than 20% deposit. Before Covid-19 with the LVR restrictions in place, there was a quota or limit on each bank where they can lend to customers with less than 20% deposit.
Now that we’ve got some of the basics out of the way.
3 hidden costs in buying a property with less than 20% deposit.
What are Low Equity Margins, Fees & Premiums
What do they mean? In bank terminology, it’s LEM, LEF & LEP. When you borrow from the bank with less than 20% deposit the banks feel that they are now at risk. Using the example above, when a bank lends out 80% of the property value they will feel safe. Because they know the customer has just put a deposit of $200,000. The chances of a customer walking away are slim. But if a customer lends out 95% or $950k of the house value. Then the bank is exposed. In return for lending a higher amount.
Some banks will implement a margin on their interest rates and it is dependent on where you sit on the LVR scale. For example
LVR Scale | Low Equity Margin | Standard Interest Rate | Real Interest Rate |
|---|---|---|---|
Over 95.01% | 1.50% | 3.15% | 4.65% |
90.01%-95.00% | 1.30% | 3.15% | 4.45% |
85.01%-90.00% | 0.75% | 3.15% | 3.90% |
80.01%-85.00% | 0.30% | 3.15% | 3.45% |
Note: The above is based on a 1 year rate at ASB for 30 years - As of 14/07/2020
Some banks would rather implement a low equity fee or low equity premium. This is essentially a one off fee you pay upfront before getting your loan drawdown. Again, similar to the Low Equity Margin it is dependent on where you sit on the LVR scale. See the example below
LVR Scale | Low Equity Premium | Fee on $800k mortgage |
|---|---|---|
Over 90.01% | 2.00% | $16,000 |
85.01%-90.00% | 0.75% | $6,000 |
80.01%-85.00% | 0.25% | $2,000 |
Note: The above is based on a 1 year rate at ANZ for 30 years - As of 14/07/20
Interest rates
This one usually surprises people the most. Following the above hidden cost of Low Equity Fees & Margins. We see a lot of very low interest rates being advertised across our media or on our social media platforms. But the reality is that the interest rates that are advertised aren’t what you will be paying. You will be paying on the standard interest rates not the special interest rates as shown.
On another note, if you got to a bank that has a margin on top then it’s the standard interest rate + the margin rate. An example is below on the comaprision between a Low Equity Fee & Low Equity Margin. Assumptions are $800k lending, 90% LVR and Pricipal and Interest repayments.
Low Equity | Interest Rate | Monthly Repayments |
|---|---|---|
Fee | 3.15% | $3,438 |
Margin | 3.90% | $3,774 |
No Low Equity applied | 2.55% | $3,182 |
Note: The above is ANZ & ASB as of 14/07/2020
Application Fees
The bank will add on their standard application fees, depending on which bank it can range between $150-$500/application. A good broker can usually get this waived for their clients.
Bonus
If you have low deposit, there is limited cashback available from the banks and in some cases there is none. But again a good broker can usually help negotiate for it. Someone like me who does it daily, I know what is the market offering at the moment and my job is to get you the maximum possible and save you money.
Concluding with less than 20% deposit
There you have it 3 hidden cost when having a mortgage with less than 20% deposit. It's not all bad news paying a higher rate, I've helped many clients increase their deposit by ways of help through family or government through the First Home Buyers Grant - I've written a blog on this here. Where first home buyers can add another $5k or $20k per couple towards the deposit.
If you want help or guidance then book in a 10 min call with me (no obligations) or send me an email and we can go from there. Comment below and hopefully there is some value you got out of this!