Getting a house deposit together can be hard work and one of the biggest misconceptions among first home buyers is that you need a 20% deposit before you can even consider the possibility of purchasing a home. For some, this is true and for many others, this is not the case.
While a 20% deposit does give first home buyers more lender options, lower borrowing costs, better interest rates and fewer conditions, there are still options for first home buyers to purchase with less than 20%.
What funds can you use as your deposit?
The initial money you’ll need to have saved if you want to borrow from a bank or other lender to purchase your first home is called a deposit.
Your deposit could potentially be made up of funds from the following sources:
- KiwiSaver - if you’ve been a member for at least 3 years, you can withdraw most of your KiwiSaver contributions, leaving a minimum of $1,000 to put towards your deposit
- Savings
- Funds gifted to you from family that does not need to be repaid - many lenders will accept gifted funds provided the correct documentation is supplied (i.e., a gifting certificate)
Can you buy with just a 5% deposit?
In some circumstances, you can purchase your first home with as little as 5% deposit.
The Kāinga Ora First Home Loan scheme allows eligible first home buyers to purchase with as little as a 5% deposit through participating lenders. The scheme is designed to help buyers who can afford mortgage repayments but have struggled to save a larger deposit.
Not every buyer will qualify, and not every lender offers these loans, but it’s an option many people are unaware exists.
What extra costs should you factor in when you have less than a 20% deposit?
If purchasing your first home with less than a 20% deposit, you’ll need to factor in additional costs with your home loan due to the extra risk involved to the lender.
You’ll need to factor in the following additional costs:
- You’ll need to get a registered valuation on the property you’re looking to purchase
- You’ll either be charged a Low Equity Premium (which can be added to your loan); or
- You’ll have a Low Equity Margin added to your interest rate
- Lenders Mortgage Insurance – if purchasing through the First Home Loan Scheme offered by selected banks, you’ll need to pay 1.2% of the loan amount as a one-off fee. This amount can be added onto your loan.
- The bank will not be able to offer any of their ‘special interest rates’ as they’re reserved for clients who have 20% or more as a deposit
- As your loan will be larger, your loan repayments will also be higher – however it does get you on the ‘property ladder’ sooner
What is a Low Equity Premium (LEP)?
What is a Low Equity Margin (LEM)?
A LEM is a percentage amount, typically between 0.25% and 1.5% per annum (depending on your deposit amount), that is added to the interest rate of your home loan. This margin stays in place for as long as you have less than 20% equity in your home. The good news is that this margin can be removed when the equity in your property increases to above 20%. This occurs as you pay down your home loan and your property value increases over time. Often this is not revised by the bank, so it is up to you to reach out to the bank and request a review of your current equity position.
Want to find out more?
If you’re considering purchasing your first home and are not sure how much deposit you will need, speak with one of our experienced Mortgage Advisers to explore your options.
