What to consider when buying with a low deposit

A question we are getting from many first home buyers, is if it’s worth buying with a low deposit, or should they continue saving to reach a 20% deposit?

While this really depends on your situation, including your income and expenses, there are also a number of external factors that need to be considered.

Right now we are seeing a market where house prices are falling, but the cost of borrowing (interest rates) is increasing. This means serviceability of a loan is something that absolutely needs to be taken into account and a mortgage advisor can help you determine this.

While it’s likely that house prices may continue to decrease over the next months, it’s also expected they will start to pick up towards the end of the year, so for many it is a good time to buy before this happens. This is due to the fact that as house prices begin to rise again, so does the amount needed for your 15% or 20% deposit. And with prices rising as quickly as they were a couple of years ago, for many it is hard to keep up with saving this amount.

It’s then also important to consider the effects of buying with a low deposit. Many lenders then calculate a low-equity fee, which is based on your loan to value ratio. So if you are purchasing with under a 20% deposit, you would likely be subject to this fee which is either charged outright or added on to your loan. A mortgage advisor can help you work out how much this fee might be.

Some banks choose instead to use a low-equity margin, which is an additional percentage added on to your interest rate, again based off your loan to value ratio. With this method, this extra percentage is charged until your loan to value ratio reduces to less than 80% (meaning you own 20% of the property). The margin is then removed and you continue paying the normal interest rate.

It’s also worth considering the Kainga Ora First Home Loan, which assists those with under 20% deposit. To make use of this, you do have to meet specific criteria and fit under the current income and house price caps.

If you don’t quite have a 20% deposit, but are keen to get on the property ladder, then give the team at Better Choice Home Loans a call. We can take a look at your individual situation and give you advice around whether it’s worth saving the extra deposit, or purchasing with a lower deposit. You might be surprised at what options are available to get you into your new home sooner than you thought.

Get in touch with your local Christchurch mortgage advisors today on 0800 005 676