How to buy a house with a low deposit

Many homebuyers were disappointed recently when the Reserve Bank decided to keep its loan-to-value ratio (LVR) lending restrictions in place. The general idea is that you need a 20% deposit to buy a property – an almost impossible mountain of cash for the average first-home buyer, especially in the main centres.

However, mortgage brokers say you shouldn’t be disheartened by the Reserve Bank’s latest decision. Every day, buyers with small deposits are securing home loans, using a number of strategies:

Strategy #1: Spruce up your bank accounts

The Reserve Bank’s restrictions mean that banks need to lend only up to 80% of a property’s value for 90% of their new loans. That sounds daunting, but it means that 10% of any bank’s new loans can be over 80%.

Banks can, and do, lend over 80% of the value of a house on some loans every month. This roughly means that for every nine home loans where the buyer has a 20% deposit, one loan can go to a buyer with a smaller deposit.

“There’s still plenty of lending in that above-80% space,” says Rob Parsons, managing director of Mortgage First NZ Ltd. “Most lenders have still got reasonable capacity, though it’s fair to say the banks can afford to be a bit choosy about who they lend to.”

To give yourself a good chance of getting that tenth loan, you need to give your bank accounts a bit of a makeover. That means tackling high-interest debts like credit cards and consumer lending, and showing that you don’t spend your entire pay packet every month on your lifestyle.

If you’re not sure where to start, a mortgage broker can show you which debts are most likely to frighten off lenders. For instance, a student loan won’t worry your bank nearly as much as a loan on an expensive car or maxed-out credit cards.

A broker may also be able to help you time your application right – they know when your bank is looking to use up its monthly quota of 80%-plus mortgages, or whether to hold off an apply on the first of the next month.

Strategy #2: Start scheming

There are several schemes in place to help low-deposit buyers, especially first-time buyers. There’s Kiwisaver, where you can withdraw most of your money to put towards a first home, and you may be eligible for a subsidy of up to $5,000.

“I can’t think of a first-home buyer recently who hasn’t used Kiwisaver,” says Parsons, “and the Prime Minister has promised that next year the subsidies are going to double.”

You may also be eligible for a Welcome Home Loan, which is supported by Housing NZ and only requires a 10% deposit (though there are caps on your earning and loan amount).

Other criteria are also looser, says Parsons. For instance, usually a bank likes to see a history of savings that has resulted in the deposit, but with the Welcome Home scheme your deposit can come from almost any source. Consumer debt is also less of a problem.

FirstHome is a scheme that allows eligible buyers to purchase ex-Housing NZ properties at affordable prices, many below $100,000, though they are all located in smaller towns.

Strategy #3: Apply to the bank of mum and dad

Before LVR restrictions, parents who guaranteed a home loan usually had to put their whole house on the chopping block, says Ammon Acarapi, business development manager at SuperCity Mortgages. Now, your parents can use their house to guarantee only the deposit portion of your home loan, making the ‘worst case scenario’ far less alarming.

“Banks also used to want mum and dad to be able to service both mortgages, which was a hard sell to parents,” says Acarapi. “Policies are friendlier now, and parents aren’t in there for the life of the loan. Do up your house and when the valuation goes up – which can happen rapidly – you can have them released.”

Strategy #4: Join forces

Joint ventures can be a great way to pool your resources with a friend or family member to get onto the property ladder. It’s common to see a partnership between two people where one has a high-income job but no time, and the other has a lower income but time to organise everything, go to auctions and renovate a property.

In other cases, two couples use their combined income to buy a four-bedroom house, renovate it and split the profit, creating a deposit-boosting strategy that can set each of the couples up to buy a smaller house.

“Merging your financial powers and abilities can be a win-win strategy as long as the agreement is appropriate,” says Acarapi. “It’s also useful for people who are self-employed and can’t prove their income. Joint ventures are becoming more and more common.”

Strategy #5: Buy brand new

Houses purchased before construction has started are exempt from the Reserve Bank’s LVR restrictions. This means banks don’t have to shoehorn the loan into their 10% higher-risk lending category.

The ideal way to make use of this is with a ‘turn-key’ house and land package from a reputable building company, says Andre Hutley, owner of Vantage NZ.

This strategy works best in a fast-rising region like Auckland or Christchurch, he says, because during the time it takes for the house to be built, it often increases in value. So when you come to settle, you’re paying the agreed price on a house that may now be worth many thousands of dollars more.

“We have done several of these in Christchurch, where buyers have borrowed 90% and paid a 10% deposit,” says Hutley. “For one new owner, by the time her house was built nine months later, the value had gone up so much that her 90% loan was only an 80% loan.”

Ultimately, if you have a good income and you are able to save a chunk of it each payday, you shouldn’t give up on owning a house, says Parsons:

“There are probably a lot of first-home buyers who do qualify for a loan who haven’t even tried because they feel demoralised. But there’s more than one way to skin a cat. I can’t think of too many buyers with less than 20% that I’ve had declined.”