You will have to save a considerable deposit in order to be considered for a mortgage. You may view the substantial deposit required in order to buy your first home as a big hurdle, but it’s worth remembering that the bigger your deposit the less you’ll pay in interest in the long-term.
Lenders are restricted in how much they can lend you by loan-to-value ratio (LVR) rules, which are set by the Reserve Bank of New Zealand. A loan-to-value ratio (LVR) is a measure of how much a bank lends against mortgaged property, compared to the value of that property.
The Reserve Bank sets this ratio in order to avoid borrowers being too highly indebted, which would be likely to cause considerable hardship in the face of a sharp housing downturn or economic upheavals such a recession or an increase in interest rates.
From 1 November 2021 LVR restrictions stipulated that most owner-occupiers applying for mortgages would need a 20% deposit on an existing home, being able to borrow the remaining 80% if they met banks’ requirements. (LVR restrictions don’t apply in retrospect to existing mortgages, just to new ones being taken out).
Lenders such as banks can only have a maximum of 10% of new lending to owner-occupiers such as first home buyers at LVRs above 80%, which translate to deposits under 20%.
Should the first home you’re going to buy be an investment property which you’re not intending to live in yourself, the deposit requirements will be even higher.
In exceptional cases banks may lend more than 80% of the value of a property to a very a small percentage of buyers but realistically your chances of borrowing 90% or 95% of a property’s value are very slim.
Low equity margins:
For loans where your deposit is less than 20% of the property’s value, a low equity margin (LEM) may apply. This is a percentage amount usually between 0.25% and 1.5% per annum, which is added the interest rate you are paying on your mortgage. It compensates the lender for the extra risk they are taking in lending you a higher percentage of your property’s value.
Once you have 20% equity in your home the margin can be removed. This can come about because you’ve paid off some of the mortgage or because your property has risen in value.
Deposits required to purchase new builds:
A notable exception to the 20% deposit norm is the fact first home buyers usually only require a deposit of 10% to purchase a new build, rather than an existing home.