20% is the magic number for banks when it comes to how much deposit or equity goes into the purchase of an existing owner-occupied property.
You can still buy a property to live in with less than 20% deposit, but things do get a bit trickier.
When your deposit is less than 20% of the purchase price, you fall into what’s called High loan-to-value (LVR) lending criteria, also commonly known as Low Equity. For clarity, having 20% deposit is the same as having 80% LVR.
This is a higher-risk type of lending for banks and as a result, they are restricted in how much they can lend in that space. This means that a number of factors change when it comes to seeking a home loan approval.
It’s important to note that new builds are exempt from some of these restrictions – this is because the Reserve Bank allows the banks to be more bullish with new builds as they try to negate the shortage of housing in NZ.
So the following fundamentals will change under High LVR:
1. Your pricing is affected. You’re subject to a Low Equity Premium which is either an upfront fee or added to your interest rate. The exact amount changes depending on which bank but it will be approximately:
a. 0.30% when your deposit is 15-20% of the purchase price; or
b. 0.70% when your deposit is 10-15% of the purchase price
2. The affordability threshold that you are tested at is higher, meaning you can actually borrow less than you could with 20% deposit.
3. We can’t seek a general pre-approval to buy an existing property – it needs to be property specific such that it’s a “live deal”. A live deal is generally a signed Sale & Purchase Agreement on a specific property conditional on finance. Some banks may enable you to bid at auction but it’s tricky because you will may need a valuation done beforehand.
4. Banks are not always accepting new customers for high LVR applications. Because they are restricted in how much they can lend in that space, there are times when this lending is reserved for existing customers only, or even times when they are not lending in this space at all. This can change at any time.
5. And lastly, a valuation is always needed. This adds extra time and cost that needs to be factored in to the application process. Also if the valuation figure that comes back is lower than the purchase price, the bank will use the valuation figure to calculate Loan to Value Ratio (“LVR”) which can impact both the minimum deposit that you need to contribute or pricing as well.
So there’s lot’s to consider when it comes to High LVR lending – so make sure you’re working with an adviser who can help you work through everything together and give you the best chance of getting on the property ladder.