Deposits: How Much Do I Really Need For A First Home?
Before you can unlock the door to your first home, you'll need to understand how home deposits work. With various deposit percentages floating around – from 5% to 20% – it can be hard to know how much you actually need to save.
In this guide, we'll take you through the essential aspects of home deposits in New Zealand, shedding light on how much money you will need for your deposit, and where this money can come from.
What is a House Deposit?
A house deposit is a portion of the total amount a buyer pays to purchase a home. This, in combination with a home loan, covers the property’s purchase price in most cases. House deposits aren’t one-size-fits-all; they come in varying percentages.
Part of your deposit will go to the seller or their real estate agent, often called the “purchase deposit”. The remaining portion, which is the bulk of the deposit, goes to the bank. This is your “equity deposit”.
How Much of a Deposit Do I Need?
While a 20% deposit is a common benchmark in New Zealand, it’s not an absolute requirement. Depending on your financial situation and the lender’s policies, you may be able to secure a mortgage with a smaller deposit, but this often comes with trade-offs such as having higher interest rates.
The 20% Deposit
Many lenders prefer you have a 20% deposit when buying your first home because it demonstrates to them that you’re a low-risk borrower. When you’re buying a house for, let’s say, $880,000, a 20% deposit amounts to $176,000. This might sound like a substantial sum – and it is – but here’s why it’s advantageous.
Firstly, with a 20% deposit, lenders are more likely to offer you a mortgage with a lower interest rate. This can save you a significant amount of money over the life of your loan. Additionally, you can avoid the cost of Lender’s Mortgage Insurance (LMI), which is typically required if your deposit is less than 20%. LMI protects the lender in case you can’t repay the loan.
The 10% Deposit
A 10% deposit is another viable option for buying a home, considered a low-deposit home loan. Using the same example of an $880,000 home, a 10% deposit would amount to $88,000.
This deposit makes homeownership more attainable for many people who might struggle to save a larger sum. While the high loan-to-value ratio (LVR) may not result in the most competitive interest rates, it can still lead to reasonable terms. In some cases, you may still need to pay Lender’s Mortgage Insurance (LMI) and a Low Equity Premium (LEP), so it’s essential to factor this into your budget.
The 5% Deposit
A 5% deposit is the lowest deposit option and is typically reserved for very specific situations. For an $880,000 home, a 5% deposit would require saving $44,000.
The Kainga Ora First Home Loan Scheme can help first-time buyers enter the housing market with a 5% deposit, but it has specific criteria, so it’s essential to check if you qualify. Criteria includes income limits and the intention to live in the purchased property as your primary residence.
Some developers also offer turn-key new-build properties with a 5% deposit option, which can be attractive if you’re looking for a brand-new home.
However, with a 5% deposit, you’re likely to face higher interest rates, resulting in larger overall repayments over time.
Where Can Deposit Funds Come From?
While the deposit amount is crucial, banks typically have regulations regarding its source. They aim to ensure financial responsibility, requiring at least 5% to come from “genuine savings”, or money that you’ve personally saved.
Genuine savings includes money in your bank account, contributions from KiwiSaver (including government and employer contributions), and bonuses from your salary. Funds available through credit cards or funds used to repay debts are generally not considered genuine savings by banks.
Money from parents or other gifted money is not considered “genuine savings”. It can be considered a loan, but the terms and repayment arrangements must be clearly defined for your mortgage application.
While lower deposits open up opportunities for homebuyers, they also come with increased costs. It’s advisable to explore your options carefully and seek guidance from a mortgage adviser for the best strategy suited to your circumstances.
Get in touch with the team at Rapson Loans & Finance today if you have any questions about home deposits, mortgage options, or need guidance to get onto the property ladder.