Low Deposit Options For Your First Home

What low deposit options are there?

Most first home buyers do not have a 20% deposit and so ask if it’s worth making the effort to buy with a low deposit now or wait and save more.

For first home buyers, the deposit is generally one of the biggest issues, and especially in the larger centres where prices for homes are higher.

The banks say that ideally you need a 20% deposit, and while there are some options with less, often you are told that you need 20% deposit and that seems out of reach. So many think they need to wait and save… and watch house prices increase.

Will House Prices Increase?

Nobody know for sure, but many people are saying that house prices are expected to increase this year and beyond, and there’s a number of reasons people are saying this:

Firstly, you need to look at immigration. It’s been exceptionally high, and while we think it might drop off a little bit, immigration will still continue, and that puts more demand on houses, whether it be rental properties or houses that people want to buy to live in.
Secondly, the building of new houses has dried up. Most developers have stopped or slowed up considerably on what they are building, and therefore we’re expecting that there will be a real gap in the market once those existing houses are completed.
Thirdly, interest rates have peaked, or so we believe, and they could even start dropping during this year. The expectation is that they will start dropping, not hugely, but a little bit, and that gives people the confidence to buy again.
Fourthly, the property investors look to be back in the market. They have noticed there’s a lack of rental properties, which has seen rentals increase in value, which makes it more attractive, and since the change of government, they can now claim the tax return on the interest that they used to be able to. Add these four things together, and many commentators are predicting a house price increases in excess of 10% over the following 12 months, and then still increasing beyond that.

What this means for you is if you’re buying a house and you want to save a bigger deposit, you could be paying a lot more for your house in 12 months’ time. Simple math being a $500,000 house today could increase in value by 10%, $50,000 or more over the next 12 months. If you’re in the more expensive or larger cities, an $800,000 house, that could be an $80,000 increase.

Either way, it’s a lot to save in a 12-month period.

Maybe I Should Wait & Save More

So is waiting and saving the best option?

The real risk with waiting and saving is that house prices increase and potentially faster than you can save. We know that our parents would always suggest that we do save a bigger deposit, and technically it is a really good idea, but it’s not such a good idea in a market where house prices are increasing.

Can I Buy Now Before House Prices Increase?

If you can buy now, then it’s definitely worth considering.

Don’t be put off if your bank has told you that you need a 20% deposit.

You could say that The Reserve Bank is to blame as they imposed LVR restrictions on the banks, but they did this to support the stability of the housing market and there are also exemptions to these rules. Banks are limited in what they can do, but there are some exceptions to those rules too, plus there are some other ways to buy a home with a lower deposit.

These include:

First Home Loans scheme – a low deposit scheme managed by Kainga Ora and specifically for first home buyers
New Builds – these are exemption from the rules as The Reserve Bank want to encourage building of new homes to counter the housing shortage mentioned.
Banks – yes, the banks do have the ability to do limited lending to people with less than 20% deposit and from time to time they will actively be promoting this – and then other times they will not be able to do any.
Non-Banks – the restrictions imposed by The Reserve Bank apply to banks, not the non-bank lenders and so some of these are able to offer some special options for low deposits, and some allow 2nd mortgages too.
Co-Ownership – is becoming a popular way to buy a home with lower deposits and also if your income or outgoings are restricting what you can buy today. It might be the best option for buying your first home in 2024.

First Home Loans Scheme

The First Home Loan scheme by Kainga Ora supports some banks to offer loans with as little as a 5% deposit and we have access to a few banks and non-bank lenders that can often offer home loans with 10% deposit too. As mentioned, a lot of banks do not work with the First Home Loan scheme and so we have a limited number to work with, but as we work with a lot of first home buyers we know the banks policies very well and have good success.

New Builds

If you are buying a new build then most banks won’t require a 20% deposit.

The banks do vary with what they do require, and some can still offer a 5% deposit but most are 10% or 15%.

Banks also tend to be a bit more strict on criteria for new build finance too as the costs for building can be hard to lock-down even with fixed price contracts.

One of the ways you might be able to do this is with a low deposit home loan, and another is taking advantage of one of the co-ownership models.

Banks

The Reserve Bank has rules that restrict how much low deposit lending a bank can do, but they still are able to do some. It really depends on how much overall lending a bank does.

The problem with banks is that they do not even know what they can do next month which makes it hard for anyone to make plans. Generally they will only offer finance on “live deals” where they know the exact level of lending and when the settlement date is – ie: what amount of money you need and when.

Given the limitations they are also extremely picky on who they will do low deposit loans for.

Non-Banks

Some non banks offer some options for buyers with low deposits, and some also allow a buyer to have a second mortgage that can make up the shortfall.

When people think about mortgages they often only consider the banks; however there are some good options with non-banks and they’re often more flexible and not much more expensive.

If having a low deposit is an issue, then as house prices increase that issue diminishes and we may be able to refinance you to a bank quite quickly.

If you have some other issues, then non-bank lenders can often help those that struggle to prove income, they offer bad credit mortgages and can also help in many other situations when banks say “NO”.

Shared Ownership

That is where you use your deposit, you use whatever lending you can get, and a shared ownership business will help provide the shortfall, generally 10-15% of the total purchase price.

The businesses like YouOwn that provide shared ownership options are not doing it for free, so there is a cost to having them involved, but you really need to weigh up the cost of that versus the potential house price increases over the next 12 months (the time when you would otherwise be saving) and in many cases using a co-ownership type model may actually be cheaper than you think, and it can be easier too.

This means that you can get into your house earlier and at today’s prices.

What’s Your Next Step?

Many Kiwis dream of owning their own home, but believe that it’s only a dream. Others will make the decision to talk with one of the team and many are now home owners!

It costs nothing to find out what low deposit options are available and might suit you.

As some of New Zealand’s top mortgage adviser we can explain to you how these options work and help you work out what is the best option for you, or to give advice that can help get you on the pathway to home ownership.