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Home Buyer: getting your deposit together

14 August 2015 / Published in Your Money
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This is the second instalment of our Home Buyer series. Read the first instalment Mortgages and home loans made simple here.

Your first step once you’ve decided you want to buy a house is to get your deposit together. Depending on what your savings plan has been to date, you might almost be there or you might be starting from scratch.

What is a deposit?

A deposit is the amount of money you have to contribute towards the purchase of a home – i.e. your deposit will typically be the difference between the purchase price of the property and the amount you need to borrow, also referred to as your initial equity in the property.

Why do you need a deposit?

Having a deposit shows the bank your commitment to owning a home and repaying the loan. Your savings history will help show the bank that you’re able to make the home loan payments.

Contributing more towards the purchase of your home also means lower home loan payments as you’ll be taking on less debt. The more you’re able to contribute, the lower your loan balance will be, and the more you’ll save on interest.

A deposit, or having equity in your house, helps reduce the risk of you owing the bank more than your house is worth if there was an economic downturn and the value of your property was to decrease.

How much deposit will you need?

The deposit percentage you’ll need depends on a range of factors like the type of property, the location and how much you can afford to repay.

You’ll often hear people referring to needing a 20% deposit but this isn’t always the case – not everyone will need as much as 20% and some may even need more. The perception of needing a 20% deposit comes from the changes the Reserve Bank of New Zealand (RBNZ) has made in recent years. The RBNZ has restricted the amount of new residential lending a bank can provide to customers who have a Loan to Value Ratio (LVR) of over 80% (i.e. a customer who has a deposit of less than 20% of the home’s value).

So while you may need to provide a deposit of at least 20%, you could still qualify for a loan with a lower deposit.

It’s best to discuss your situation with one of our lending specialists to determine the deposit amount your house purchase may actually require.

Read more about Loan to Value Ratios (LVR) to learn how the restrictions might affect you.

The deposit requirements we’ve talked about apply if you’re going to live in the house; if it’s an investment property in Auckland then there may be other deposit requirements which one of our lending specialists can discuss with you.

Pulling together a deposit may seem daunting, but it’s not impossible and doesn’t always need to be made up entirely from savings. Here are some helpful tips to consider when getting your deposit together.

Set an everyday budget

Plan and set an everyday budget using this helpful money planner. Work out your needs, your wants and how much you can save each pay. Then take another look at your wants and see if there’s anything you can cut out. Remember to be realistic – don’t say you’re going to stop buying that daily coffee if you won’t actually stop.

You may also like to try reducing some of your more expensive costs – maybe you can rent a smaller house until you buy yours, move in with family or catch the bus instead of driving. Every little bit you save will help!

Then you can work out how long it will take you to save a deposit – putting a timeline on things will help keep you motivated.

Stay committed to your saving

Once you've worked out how much you want to save, set up a savings account. There are accounts that offer incentives if you don't make any withdrawals, so look around for the best deals. Once you get your home loan you won't be able to opt out of paying it, so try to treat your savings with the same dedication. Automatic payments (APs) are a great way to stay on track. It’s a good idea to set up a savings AP on payday - that way you're not just putting away whatever's left over at the end of the month.

Pay off debt

It’s a good idea to go into the house buying process as debt-free as possible. The less financial commitments you have, the more you’ll be able to put towards paying your home loan. If you’ve got debt in a few different places – such as a credit card, store card, hire purchase and personal loan then it might be cost effective and more convenient to consolidate it. Your main focus can then be on paying it off– read our tips for reducing debt.

Figure out your price range

Work out how much you could afford to borrow for a house. This will be influenced by a range of factors – e.g. how much you earn, your living expenses, your existing debt repayments and what you’ll have left over to cover your loan payments. Take a look at our home loan calculators to help you come up with this figure, or talk to one of our home loan specialists.

A good rule of thumb is to try to keep your home loan payments close to your current rent payments as you already know you can afford these. However be mindful that if you’re already paying $600 a fortnight on rent and another $400 into your savings then it’s likely you’ll probably be able to commit to $1000 a fortnight in home loan payments.

You will also need to allow for ongoing rates and insurances.

Once you’ve got an idea of how much you can afford to borrow you’ll need to consider how much deposit you’ll be required to have. This will usually be between 5% and 30% but will depend on the property type and the bank’s lending criteria.

Gather your deposit

With house prices continuing to rise, the RBNZ’s LVR restrictions and a general increase in the cost of living, it can be hard to save a deposit (even if you’re cutting costs and saving hard). Thankfully, there are more options than ever for coming up with a deposit.

  • Saving: Once your budget is sorted, it’s time to get saving. The good news is that it’s not your only option but banks still like to see a savings history – even if the majority of your deposit isn’t made up of your own savings. To get started check out our tips for saving towards a goal.

If you’re a first home buyer then there are two ways you can use KiwiSaver to buy your first home.

  • KiwiSaver first home withdrawal: You can apply to withdraw your KiwiSaver savings, leaving $1,000 in your KiwiSaver account, to buy your first home. You’ll need to have been a KiwiSaver member for at least three years, have never owned property or land and have never made a KiwiSaver first home withdrawal. You’ll also need to be buying a home you intend to live in. In some situations this withdrawal is also available to previous home owners who meet the relevant criteria – for more information see hnzc.co.nz. It’s a good idea to speak to your solicitor or conveyancing practitioner about whether your KiwiSaver withdrawal will be available for any upfront deposit required.
  • KiwiSaver HomeStart Grant: The KiwiSaver HomeStart Grant is another feature, available from Housing New Zealand. You can get up to $5,000 for an existing home purchase or up to $10,000 for building a new home or purchasing a newly built home. Additional eligibility criteria applies to the HomeStart Grant, including minimum contributions, income thresholds and regional house price caps; so make sure you get in touch with HNZC to find out whether you are eligible.

You can find out more by reading this blog post about using KiwiSaver to buy your first home or visiting the KiwiSaver website.

  • Gifting: You can use a cash gift from your parents (or someone else) as part of your deposit. However you will need to get them to sign a gifting certificate (which your bank can provide) confirming where the money came from and most importantly that there is no requirement to repay it.
  • Guarantors: Another option, which is an alternative to a cash gift, is for your parents to act as guarantors on your home loan. This may require them to provide their own home as security for your loan and be able to show they can repay the amount they are guaranteeing. There’s even the option to just guarantee a portion of your home loan (e.g. 20%) as opposed to the entire home loan amount. This might be more appealing to your parents as it means they’re likely to be released from their guarantor obligations a lot sooner.
  • Buying with friends and family: If buying a property on your own isn’t an option you might like to consider buying with friends or family to split the costs. You can combine your savings or use equity in other properties to provide a joint deposit and then split the cost of payments to make it easier to afford.

Remember, you should always seek independent legal advice throughout the home-buying process but it becomes especially important if your parents (or anyone else) are helping you with your deposit or purchase.

As you can see, there are multiple ways to get your deposit together and how much you’ll need depends on your specific situation. Follow the steps above, read our Home Buyer series and then get in touch when you’re ready to enquire about buying a house.

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