Is it possible to get a home loan with no deposit?
Since the global financial crisis, no-deposit home loans have become a ghost story in New Zealand – and even low-deposit home loans are now tough to get.
In 2013, the Reserve Bank of New Zealand (RBNZ) placed limitations on the proportion of high loan-to-value ratio (LVR) loans any lender could provide. Though these have relaxed slightly over time, acquiring a mortgage remains a challenge for many hopeful first time home buyers.
Why can’t banks give zero-deposit loans?
LVR restrictions exist to protect New Zealand’s financial system against the risk of a housing market crash. They were originally introduced in response to rapid house price growth, alongside a sharp increase in low-deposit lending. This rapid price growth increases the risk and potential impact of a major correction in house prices, and consequential loss to lenders. With mortgage finance representing half of bank lending in New Zealand, according to RBNZ, such losses could have far-reaching implications for our economic system.
If housing prices were to fall this erodes a homeowner’s equity – most heavily impacting new home buyers who have entered the market with little equity at all.
As of January 2018, banks are entitled to have:
Up to 15% of their lending portfolios comprised of high LVR loans to owner-occupiers (20% deposit).
No more than 5% comprised of high LVR loans to property investors (35% deposit).
These restrictions mean, in most cases, banks are reluctant to provide mortgages to first home buyers without at least a 20% deposit.
So if no-deposit home loans aren’t an option, how can Kiwis access mortgage finance with little-to-no savings?
Low deposit loans
A deposit of 20% in Auckland, where the average asking price is over $950,000 (according to the December New Zealand property report), would require first home buyers to have savings of $190,000. Add to this the upfront costs associated with buying a home, and many Aucklanders simply cannot afford the market. For the rest of the country an average deposit of $134,000 is still no easy feat to save. The good news is, there are ways to get some extra help.
A mortgage broker may be able to help you find a low deposit loan, or you could look into a Welcome Home Loan, underwritten by Housing New Zealand. This loan is available through a range of New Zealand banks and you must still meet the individual lender’s criteria to successfully apply. First home buyers who are able to make regular mortgage repayments, but are struggling to save for a deposit, can acquire a mortgage with as little as a 10% deposit under this scheme.
Income and house price caps apply according to your region and specific borrower situations. Remember when accessing a low-deposit loan that you will generally also be required to pay Lender’s Mortgage Insurance equivalent to around 1% of the purchase price.
Get a guarantor
If you were to achieve a no-deposit home loan in New Zealand, it would likely be with an existing homeowner acting as a guarantor on your loan. In this case, your deposit will be drawn from the equity in your guarantor’s own home.
A loved one may be willing to act as your guarantor. This can be risky, as if you default on your repayments, the lender may be able to claim your guarantor’s home. Both you and your guarantor should take the time to consider this carefully and research strategies to mitigate losses, such as a limited guarantee. Make sure both parties involved seek independent legal advice to ensure it’s the right move for everyone involved.
For members of KiwiSaver, there are other ways to build the capital required to buy a home:
KiwiSaver first-home withdrawal: You may be eligible to withdraw some of your KiwiSaver balance to go towards your first home deposit. Check your eligibility here.
KiwiSaver HomeStart grant: Members who have contributed to their KiwiSaver for at least three years may be eligible for a grant of $1,000 per year of contributions to KiwiSaver up to $5,000 – or $10,000 when buying with a partner. Check your eligibility here.
Think outside the box
The dream of home ownership is still strong. For Kiwis, it’s much more than just an asset class. While getting on the property ladder is by no means easy, by thinking outside of the box and doing things differently could be the way to make it work for you.
Buying your first home isn’t easy – but it is possible. To begin the search for your first home, look to the listings on New Zealand’s largest dedicated property website: realestate.co.nz.