How much deposit to buy a house NZ?
Two of the more popular search engine search terms in New Zealand housing include “how much deposit to buy a house NZ” and “how to buy a house in NZ with no deposit”. As inflation continues to rise, household budgets come under pressure, those looking for a house in New Zealand may struggle. While there are strict Loan to Value Ratio (LVR) regulations in place, all is not lost; there are ways to reduce the required deposit to buy a house in New Zealand.
House prices in New Zealand
A recent report by macrobusiness.com has highlighted current challenges for the New Zealand property market. However, this changing environment is on the back of enormous house price rises across all suburbs of New Zealand over the last few years.
A snapshot of the report reveals:-
• In the year to February 2022, mortgage commitments fell by 23% after showing a 128% increase in the year to May 2021
• Investor mortgage commitments fell by 47% in the year to February 2022 against growth of 116% in the year to May 2021
• The two-year mortgage rate has increased from just over 2.5% in mid-2021 to approaching 4.5%
As New Zealand, like many other countries, begins to exit the worst effects of the Covid pandemic, the Reserve Bank of New Zealand has already started to increase the official cash rate. Having been sub-0.5% for much of 2021, the rate now stands at 1% and is expected to hit 2.5% in late 2022. This directly impacts mortgage rates, both fixed-rate and floating mortgage rates. Consequently, there is a lot for first-time buyers to think about and those looking to move home.
What is the Loan to Value Ratio (LVR)?
In simple terms, the LVR is the ratio of mortgage funding compared to the property’s value. For example, if you were looking to buy a property for $300,000 and secured a mortgage for $240,000, the LVR would be 80%, 70% for a mortgage of $210,000, etc. This now prompts the question, who sets the maximum LVR?
In light of the 2008 US mortgage crisis, which resulted in a worldwide economic downturn, global central banks and regulators were forced to introduce restrictions on mortgage lending. The easiest way to do this was to impose a maximum LVR, thereby offering mortgage providers an element of insurance between mortgage funding and the property’s value. Initially, this was set at 80%, although during the Covid pandemic, they have been various changes and suspensions of this policy to reflect these unique economic times.
How much deposit to buy a house NZ?
At this moment in time, only 10% of new mortgage loans can be for more than 80% of the property’s value. During the Covid crisis, this figure was 20%, but as New Zealand property prices continue to rise, regulators have reacted to the potential risk to homeowners and mortgage providers. However, it is essential to note that while mortgage providers have limited abilities to provide mortgages above the 80% LVR, they are not obliged to do so.
The official cash rate in New Zealand is expected to increase to 2.5% by November 2022, which has prompted some mortgage providers to review their product mix. Many have already begun withdrawing those mortgages with an LVR above 80%. Therefore, the vast majority of those looking to purchase a property in New Zealand now require a minimum 20% deposit. For those struggling to raise a deposit, there are various options.
House prices in New Zealand
Figures released by the Real Estate Institute of New Zealand (REINZ) cast a very interesting light on the New Zealand housing market. In the year to January 2022:-
• The average New Zealand home increased by 20.5% to a staggering $880,000
• Stripping out the expensive Auckland market, annual appreciation was 24.6% – equating to an average property value of $750,000
It is essential to put this into perspective because the Auckland property market has an average house price of $1.2 million after a 20.6% annual increase. As we touched on above, the ongoing rise in the New Zealand central bank interest rate has already impacted the mortgage market, seeing significantly reduced demand. The fact that property investors in New Zealand also appear to be scaling back their operations is indicative of the changing market trend.
How to buy a house in New Zealand with no deposit
Before looking at how to buy a house in New Zealand with no deposit, it is crucial to consider the relatively small number of low deposit mortgages currently available. These tend to be targeted toward the first home buyer market, but how widespread are high LVR/low deposit mortgages?
The first thing to consider is that not all first-time buyers will want a high LVR/low deposit mortgage. Indeed, recent mortgage data from the Reserve Bank of New Zealand shows that more than 60% of first-time homebuyers had a deposit of at least 20%. Therefore, in theory, only 40% of first-time buyers may be looking to access high LVR/low deposit mortgages. This takes some of the pressure off mortgage providers!
This brings us to the options for those looking to buy a house in New Zealand with no deposit.
Bank of mum and dad
As children grow up, flee the nest, many parents are left with large properties that have dramatically increased in value in recent years. Even though we are currently going through a cost-of-living crisis, many parents are looking to assist their children in climbing onto the property ladder. The bank of mum and dad is still open for business!
Those with savings, attracting a relatively low rate of interest, may be in a position to give/lend funds to their children for a deposit on their first home. Traditionally, it is only on the death of their parents that many children receive what can be a significant inheritance. However, in recent years we have seen a change in trend, with more parents looking to help their children while still alive. They can take advantage of various tax exemptions and gift allowances to assist their children when buying their first home. Unfortunately, this is not an option available to all parents or first-time buyers.
First Home Loan
The New Zealand authorities operate a First Home Loan system supported by Kainga Ora. This opens the possibility of acquiring your first home with just a 5% deposit and a subsequent maximum 95% mortgage. As you might expect, there are some relatively demanding criteria for this option:-
• Maximum income; one person $95,000 per annum before tax, combined yearly income of $150,000
• Minimum deposit of 5% of the property value
• Targeted towards first home buyers or a previous homeowner in a similar financial situation to a first-time buyer
• House price cap means that not all regions of New Zealand will benefit from the First Home Loan scheme
While the authorities are keen to help first-time buyers climb onto the property ladder, there is still an appreciation of the potential risks. Even though many homeowners have benefited enormously from the house price boom in New Zealand, this has placed first-time buyers in a challenging situation.
Housing association shared equity
Several housing associations in New Zealand offer joint purchase schemes for those struggling to meet the often tight mortgage criteria. This means that the housing association would fund part of the property purchase, thereby reducing the element of funding required by individuals. So how does this work?
The first thing to note is that even though the individuals will not own all of the property, they will still be allowed to live in the property rent-free. The investment by the housing association is in the form of equity which will enable them to enjoy any potential appreciation in the future. The individuals can buy back all or part of the share of the property owned by the housing association at any time. There is one drawback; this will be at the market value at the time.
It is important to note that you can increase your stake in the property as quickly or slowly as your finances allow. In addition, if you need to sell your share of the property, this is also permitted under shared equity arrangements. While there are drawbacks with shared equity, for many people, this may be the only way to climb onto the property ladder.
KiwiSaver scheme
KiwiSaver is a scheme that allows individuals to save for their retirement in a tax-efficient manner. As well as the government contributing to the KiwiSaver, employers are also legally obliged to make contributions. Even though the idea of the KiwiSaver scheme is to save money for your retirement, recent changes to the regulations have been welcomed by homebuyers.
It is now possible to use your KiwiSaver funds, including those contributions made by the government and your employer, to put towards a 20% deposit on a property purchase. As a bonus, those able to access their KiwiSaver funds may also be eligible for a HomeStart grant, although this scheme has house pricing and income caps.
New building exemption
It is also interesting to note that new builds are exempt from the LVR restrictions applicable to the wider market. This allows you to commit to a property purchase in the early stages of construction, or within six months of completion, without theoretical restrictions. However, all lenders will still consider your financial situation before committing to any mortgage, let alone one above an 80% LVR.
Home deposit loans
Here at Alternate Finance, we offer loans for house deposits to assist those looking to purchase a property. Positioned between the traditional banks and payday lenders, we provide competitive rates between 13.95% and 26.98% per annum. You may be slightly short with your deposit funds, or maybe you are suffering short-term cash flow issues. Either way, we will consider all applications on merit, although we do take our obligations as a responsible lender very seriously.
It is vital that you can cover both your home deposit and mortgage loan repayments without excess pressure on your budget. If you are struggling in the short term, there may be options to bring in a guarantor or provide additional collateral. We fully appreciate the modern-day challenges of those looking to buy their first home, or move properties, and offer a degree of flexibility. However, if a home deposit loan is unaffordable in your current financial situation and other options are limited, we will be honest and upfront with you.
Conclusion
While the search terms “how much deposit to buy a house in NZ” and “how to buy a house in NZ with no deposit” will offer many options, it is essential to read the associated criteria. The New Zealand government is in a very tricky situation, looking to keep a lid on what has been an extremely buoyant property market without closing the door to first-time buyers. When you also factor in expectations that New Zealand base rates could rise from 1% to as high as 2.5% in 2022, this directly affects mortgage rates.
Looking at the current cost of living crisis there are challenges ahead, but these are not insurmountable. Of course, you will need to plan and take advice at every opportunity. But by bringing together the various pieces of the jigsaw, you may still be able to buy that dream home!
