If you have less than 20% deposit, you are referred to (by the banks) as a Low Equity (or Deposit) Borrower.  You are required to meet a different set of criteria to borrowers with 20% or more.

Understanding the requirements from the banks is confusing.  We’ve come up with the most common questions to try to make it all easier.

How much is the absolute minimum deposit that I need?

The ideal deposit for any purchase is 20% but typically, the minimum required is 10% for an existing property and 5% for a new-build.  

Note: your income needs to be very good for a 5% deposit but it is possible.  You’ll also need to explain why you haven’t saved more on your good income (for example, you’ve been paying down debt).

I heard banks weren’t lending to people with less than 20% deposit any more?

Banks can only lend out 15% of their total lending to “Low Equity Borrowers”.  This means, if you are a Low Equity Borrower and you want to borrow $150,000, the bank has to lend out another $850,000 to other “High Equity” Borrowers.  Each bank regularly decides (usually weekly but it can be daily) if they have enough to lend out so often a “no” today can be a “yes” tomorrow.  

The short answer is, main banks are still lending to Low Equity Borrowers but it depends on the day.

Can I be gifted my entire deposit or do I need savings?

The banks want to see that you are responsible with your money.  If you have been renting and have not been able to save money, then are you likely to pay down you mortgage?  

Most banks, therefore, require that you have saved at least 5% of the purchase price – often referred to as “genuine savings”.  So if you are buying a $500,000 home, you would need to have saved $25,000 on your own.  The rest of your deposit can be gifted by a parent.

What counts as “genuine savings”?

• Money in the bank (obviously!)
• KiwiSaver – including the amount received from the Government and your Employer
• A bonus from your Salary

What doesn’t count as “genuine savings”?

• Money available on your Credit Card. Some people try to withdraw it to use as a deposit. Don’t do this!
• Debts that are being repaid unless you can prove the original loan and show an agreement
• The First Home Grant

Note: the First Home Grant can be used as a deposit but doesn’t count as part of the required “5% genuine savings”.

Can I get a loan from my parents rather than a gift?

Yes, that’s perfectly ok.  As long as you can afford the required repayments to your parents and the mortgage payments, the bank will be ok with it.  Usually, the loan from your parents would be over 5 years which can lead to quite high payments though so do your calculations first.

What are some tips for getting a mortgage with a small deposit?

• Keep your spending to a minimum. Banks prioritise giving mortgages to clients who are showing that they have their spending under control.
• Minimise your secondary debt. Don’t let the banks increase your Credit Card limit and don’t take out any new lending.
• And finally, our number 1 tip! If you’re a couple, bank at separate banks. Banks can often lend to their own customers first. But if you both bank with the same bank, you only have one option. If you bank separately, you now have 2 banks to work with.

Summary:

In summary, a 5% deposit is the minimum typically need for construction lending.  A 10% deposit is the minimum required for existing homes.  Most banks don’t allow a pre-approval for Low Deposit Borrowers so you have to have an offer accepted on a property before you can apply though.