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    For the last decade, first-home buyers have worked under the assumption that they need a 20% deposit to get a mortgage. In a market where the average house price is over $500,000, this meant first-home buyers had to save for years to have a hope of getting into a house.

    But the 20% deposit rule isn’t as hard and fast as it seems. Although many banks limit the number of loans they’ll approve with a high LVR – even after the LVR rules were relaxed – there are always options for low-deposit borrowers, as long as they have the money in hand to repay the loan. Non-bank lenders, new builds, borrowing under a government loan scheme – there are a few different ways to get into your own home without that hefty deposit.

    Here’s what you need to know about getting a low-deposit loan:

    Get a government-backed loan

    The First Home Loan is designed to help combat high house prices and get people into their own home, even if they can’t save a huge deposit.

    First Home Loans are provided and managed by selected banks and lenders but underwritten by Kainga Ora. This allows the banks to relax their low-deposit lending rules without the risk. Deposits for these loans can be as low as 5%.

    Of course, not every borrower can qualify. As the name suggests, only first home buyers can apply for a loan under the scheme. You have to be buying a home to live in – not an investment property – your income needs to be under a certain threshold, and the price of the property you’re buying needs to be under a certain value as well.

    Of course, the First Home Loan is still a loan – all money borrowed needs to be paid back, so it’s also essential that you have a steady income to meet repayments.

    Build your own home

    Because housing stock is low in many parts of the country, the government incentivises building new homes. In many cases, you can get a mortgage to fund a new build with a deposit of just 10% if it is a turn key project.

    Of course, building comes with its own complications – cost overruns, financing in stages as work is completed, and the need to pay rent elsewhere while construction is completed. If you have just 10% of the value for your deposit, your building options may be limited as well – many lenders will only approve low-deposit construction loans for projects with a fixed price, to avoid costs going up and increasing your LVR during the build.

    Get a guarantor

    If you’re lucky enough to have family willing to help, you could get them to act as a guarantor for the missing percentage of your deposit. Essentially, if you have just 10% saved, they guarantee the remaining 10% to help you meet the bank’s loan requirements. They don’t need to pay anything unless you default on the loan, but they will need to speak with a lawyer and have their income assessed. Once you have paid off their portion of your mortgage, they’ll no longer be liable and can be taken off your loan documents.

    Fees, rates, and complications

    The bad news is, low-deposit loans are often more complicated and expensive than traditional mortgages. When lenders take on a low-deposit loan, they’re taking on more risk, and increased fees and requirements reflect that. It doesn’t mean you shouldn’t apply, but it’s good to be aware before you start.

    Low-equity margins

    Most banks and lenders will add a low-equity margin (LEM) to your interest rate if you are borrowing over 80% of your home’s value. This means your rate will be higher – sometimes up to .75% or more – than the standard advertised interest rate.

    Low-equity fees

    A low-equity fee is a one-off charge for borrowers with a low deposit. The amount depends on the value of the property, the deposit amount, and other factors, and can be added to your mortgage if you can’t afford to pay it upfront. The low-equity fee usually covers any insurance the lender needs to take out as a result of your low-deposit loan.

    Registered valuation

    Banks almost always request a registered valuation for low-deposit loans. This can cost $500 or more. Of course, you also need to pay the standard costs associated with buying a house – legal fees, building reports, moving costs, and any number of other charges. Sometimes, banks do give cash back to reduce your burden to some extent.

    How to up your chances of a low-deposit loan

    It can be harder to be approved for a low deposit loan, so you need to get all your ducks in a row before you apply. Whether you’re talking to a bank or a non-bank lender, they’ll want to see proof that you can make payments on your loan long term.

    Make sure you have

    • Evidence of your deposit savings
    • Great credit history and account history with your current bank
    • Proof of steady, long-term income from your job or business
    • Little or no debt
    • A clear budget that shows your regular expenses
    • A clear credit report

    For the bank, it’s about minimising the risk and not ending up with late repayments or a mortgagee sale. For you, lining up all these documents is valuable as well – it’s vital to know you can afford to make repayments on your mortgage long-term. It’s not just about whether the bank will approve your loan, it’s also about whether you can fit payments into your budget.

    Talk to a Mortgage broker

    If you’re a first-home buyer with a low deposit, getting expert advice is the best way to make sure you’re making the right decision. A mortgage broker will be able to find a range of possible lenders and loans, review your budget and options, help you apply for loans or organise guarantors, and make sure the mortgage process goes smoothly.

    Want to know more about getting a low-deposit home loan? Talk to one of the brokers at Global Finance now on 09-255 5500 or reach us at info@globalfinance.co.nz

    **These are general guidelines and are by no means a reflection of bank or lending policies