Deposits: How much do you need to buy your first home?

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.

Note: this article has been updated to reflect the changes to the LVR rules from 1st May 2020. Here’s an article on those LVR changes.

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

What is the minimum deposit that I need to buy a house in New Zealand?

The ideal deposit for any purchase is 20% but typically, the minimum required is 10% for an existing property and 5% for a Turn-Key build.  We are seeing examples where people can buy existing homes with less than 10% but they must earn a significant amount and have a very clean application – ie; no secondary debt (Credit Cards), good savings habits etc.

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?

The rules have changed and banks are free to lend as much as they like to high-LVR borrowers. This doesn’t mean they will though. Borrowers with less than 20% deposit will need to have a higher income than those with more deposit.

The short answer is, main banks are still lending to Low Equity Borrowers and it’s well worth talking to an Adviser to see if you meet the criteria.

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. Read this article to find out why you can'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.

Do I ever need more than 20% deposit?

For some types of properties, the banks require more than 20% but these are unusual.  Leasehold properties are a prime example as they typically lose value as the lease approaches it's renewal date.  Lifestyle properties, poorly clad plaster homes or especially small apartments (<40-50sqm) can also require up to 50% deposit.  From the bank's point of view, anything that will appeal to only a small sector of the market will be harder to sell and therefore require more deposit.  Only a limited number of people want (or can) live in a 40 sqm apartment so require a larger deposit to cover any potential shortfall.  If you're looking at a standard home or reasonable sized apartment, 20% should be ample.

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 typically 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.