The mystery of the deposit – how much do you need to save?
You’re going to buy a house- a home or an investment. Unless you have won lotto or received a big inheritance you are going to need to save some money for a deposit. The more funds you have for the deposit the less you will need to borrow, or potentially the larger value property that you will be able to purchase. By having a bigger deposit and borrowing less from the bank/lender you minimise your repayments and reduce the amount of interest that you will pay over the term of the loan.
The deposit is just one aspect that the banks look at when you are seeking funding for a loan to purchase a property. Today we are just looking at the deposit.
Your deposit can be made up of any combination of the following:
- Cash savings
- KiwiSaver Savings if you are a first home buyer – conditions apply (we will talk more about this in our next post)
- First Home Grant if you are a first home buyer – eligibility criteria apply
- A gift – funds from another source (typically family) that do not need to be paid back
- Equity from another property
So how much do you need for a deposit? The size of the deposit is dependent on the purchase price of the property you are buying and is typically expressed as a percentage. Ideally you will want to have a deposit of 20% or more.
When you are borrowing from the bank the percentage of funds you have as a deposit will determine the percent that you borrow. The term used for this is LVR – Loan to Value Ratio. Banks are looking for LVR’s of 80% or less, meaning that you are borrowing less than 80% of the price of the property. Over 80% will typically require a registered valuation to confirm the property value, and you may incur Low Equity Margins or fees. Interest rates may also be higher.
The Reserve Bank of NZ (RBNZ) sets rules for the LVR levels for homes and investment properties. Investment Lending is normally capped at 70% and home loans are capped at 80%. The banks can lend above the RBNZ LVR caps, but only do so for limited customers with special circumstances such as some first home buyers.
Currently the RBNZ have suspended the LVR restrictions as part of the Covid-19 relief support.
Banks and Lenders like to see savings outside of KiwiSaver to check that you are able to manage your money and can save for things that you may need to do to your property like maintenance or any unexpected repairs.
In our next post we’ll look at how you can use your KiwiSaver funds to help with a deposit, and also how to access a First Home Grant.