As financial advisers at RSFA, we understand that one of the biggest challenges for aspiring homeowners is accumulating a home deposit. However, in New Zealand, there are options available for those with limited savings through low-deposit lending. In this blog post, we will delve into what low deposit lending is, how it works, and the considerations home buyers should keep in mind.
Understanding Low Deposit Lending: Low deposit lending refers to the practice of obtaining a mortgage with a deposit of less than the traditional 20% of the property’s purchase price. While it provides an opportunity for buyers with limited savings to enter the property market, it’s important to note that low deposit lending typically involves additional considerations and costs.
Loan-to-Value Ratio (LVR): The Loan-to-Value Ratio (LVR) is a key factor in low deposit lending. It represents the percentage of the property’s value that a lender is willing to finance. For example, with an 80% LVR, the lender provides 80% of the property’s value, and the borrower contributes the remaining 20% as a deposit. However, low deposit lending allows borrowers to secure a mortgage with LVRs of 90% or even 95%.
Implications and Considerations: While low deposit lending offers an opportunity to get on the property ladder sooner, it’s crucial to be aware of the potential implications:
- Lender’s Mortgage Insurance (LMI): In situations where the LVR exceeds 80%, lenders often require borrowers to pay LMI. This insurance protects the lender in case the borrower defaults on the loan. It’s important to factor in the cost of LMI when assessing the affordability of a low-deposit loan. There are different methods bank insure their low deposit lending, through external insurers, and self-insurance (by charging a higher cost for the increased risk and also capital adequacy costs are increased by way of a RBNZ (Reserve Bank of New Zealand) requirement to keep additional funds in place for this higher risk lending.
- Higher Interest Rates: Lenders may charge slightly higher interest rates for low deposit lending, as it carries a higher risk. It’s advisable to compare rates from different lenders to ensure you secure the most competitive option.
- Limited Borrowing Capacity: With a low deposit, your borrowing capacity may be reduced and there are different ways your lending power can be crunched when you have less than a 20% deposit. Lenders assess your ability to service the loan based on factors such as income, expenses, and credit history. It’s essential to have a clear understanding of your financial situation and consult with a financial adviser to determine your borrowing capacity.
- Property Valuation: The lender may ask (and typically will) require a valuation to determine the property’s worth, which may affect the loan approval process. It’s crucial to have a realistic expectation of the property’s value and be prepared for potential variations, which may mean your low deposit needs to be increased with the lender adopting the ‘lower of the two’ approach, between the purchase price and the valuation reported value.
- Building Equity: With a lower initial deposit, it may take longer to build equity in your property. It’s important to plan for this and consider future strategies, such as making additional repayments to increase equity over time.
Navigating the Low Deposit Lending Process:
To navigate the low deposit lending process effectively, consider the following steps:
- Seek Professional Advice: Engage a financial adviser who specialises in mortgages and low-deposit lending. They can guide you through the process, provide tailored advice, and help you make informed decisions.
- Save as Much as Possible: While a low deposit is allowed, saving more can provide advantages such as a higher equity stake and potentially better loan terms.
- Budgeting and Affordability: Assess your financial situation and create a comprehensive budget to ensure you can comfortably manage mortgage repayments and associated costs.
- Research and Compare Lenders: Take the time to research and compare different lenders offering low-deposit lending options. Consider interest rates, fees, and customer reviews to find a lender that aligns with your goals.
Low deposit lending offers an avenue for aspiring homeowners with limited savings to enter the property market. However, it’s crucial to be aware of the implications and considerations involved. We even have a lending arrangement that may be applicable that does not fit the normal bank model, but allows home ownership via a shared equity arrangement (that can later be converted to full ownership for our clients). By seeking professional financial advice by contacting RSFA, we can help you to work through this process to help attain your home-buying dreams. As we work for our clients and not the lenders, we will seek the best outcome for you, regardless of which lender partner that we may recommend.
This blog contains general information only. The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Rod Schubert Financial Advice (RSFA) shall not be liable or responsible for any information, omissions, or errors present. We recommend seeking professional legal and/or financial advice before taking any action. Our Disclosure Statements are available on our website.