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Home Loan Basics

Low deposit home loans

A standard deposit for a home is 20%. But if you have less than that it doesn’t mean you’re locked out of the property market. Let’s have a look at buying a home with a lower deposit.

LVR (Loan-to-value ratio)

Whether you’re purchasing a property with a small or large deposit amount, your lender will look at your LVR (loan-to-value ratio) to determine affordability.

LVR is the amount a bank or lender lends against a mortgaged property, when compared to the value of that property. It’s calculated by dividing the loan amount by the purchase price (or current market value) of the property.

For example, if you are borrowing $450,000 to buy a house valued at $600,000, your LVR is 75%.

The bigger your deposit, the lower your loan to value ratio (LVR). For owner-occupied properties, an 80% LVR lend (i.e. 20% deposit) is considered standard. A ‘low-deposit’ home loan is where the deposit is less than this standard 20%.

What are the upsides and downsides of having a low deposit?

Upsides

You get on the property ladder more quickly.
As property values increase, so do purchase prices. Getting in early and buying now at a lower price means you’ll spend less than if you wait to build the deposit to 20%.
Equally, as property prices increase, so does the value of your property. This means that as you repay your home loan your LVR falls sooner than expected (remember, LVR = loan amount divided by current market value).
As inflation rises and the cost of living increases, that magic 20% deposit amount can be harder to achieve.

Downsides:

Property purchases with a low deposit / high LVR are considered to have a higher default risk. More of your income is going towards loan repayments and there’s less breathing room if additional expenses occur.
Because of this higher default risk, banks charge an additional low equity premium (LEP), or margin (LEM), to counteract the risk the bank is taking with you. Read more about LEP/LEM in our related guide linked below, but effectively a low deposit loan means that the bank will charge you a slightly higher interest until your LVR reduces to 80% or below.
Special fixed rate offers are not available for low deposit home loans.

When might I be able to borrow with a low deposit?

First Home Loans. Offered by selected banks, these home loans are underwritten by Kāinga Ora, which allows loans for first home loan buyers who have a deposit of at least 5%.
Buying a new build. Some banks and lenders allow a 10% deposit to purchase a new-build, owner-occupied home.
Lending for remediation works on the house. A bank would consider the expected market value of the property after any work is completed.
Bridging Loans for owner-occupied purchasers to buy their new property in advance of selling the property they are currently living in.

Keep in mind that the above are just examples. Approval by a lender will be subject to their policies and a review of your personal circumstances.

Anything else I need to know?

Apart from the deposit amount, you’ll also need to factor in some one-off and recurring expenses.

Legal costs: You will need a lawyer for conveyancing services for the purchase of your new home. Reach out to Tella if you need a referral to one of our trusted property lawyers who can offer you a discount on standard fees.
Registered Valuation: Most lenders will require a registered valuation on your property if you have less than 20% deposit. This cost could be upward of $500.
Furniture, Contents and Appliances: Allow for the upgrade of your appliances and furniture to suit the style of your new home.
Insurances: As your circumstances are changing, it’s a good time to review your insurances (life, home, contents etc.), to make sure they’re at appropriate levels.

Tella is here to help you. Chat with one of our Home Loan Specialists who can talk you through the low deposit policies of specific banks and lenders. Click on the chat bubble on the bottom right of this page to get in touch.

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KiwiSaver, First Home Grant, First Home Partner and First Home Loan

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