One of the biggest hurdles to getting the home you want is having enough of a deposit to put down. Different lenders will require varying deposit amounts, and although it is possible to get by with a deposit as low as 5%, most lenders will require between 10 and 20% deposit. That’s 20% on the purchase price of the house you want to buy. So, if you want to buy a $700,000 house, you will need to put down $140,000 as a 20% deposit. Not many people have $140,000 sitting in their bank account. Fortunately there are many ways to contribute toward this deposit.
Your cash savings are the most important part of your deposit contribution. Many lenders will require a minimum of 5% of your purchase price to come out of your own savings. Particularly if your loan to value ratio is over 80%. Not only that, but your ability to save will also be a good indication to yourself and the lender as to how disciplined you can be with money.
The good news is that this 5% of savings can also include your KiwiSaver. So this does not only have to be money that you have put aside each week into a savings account. Although you will most likely need to top up your deposit with some of your own cash savings.
There are plenty of articles out there on how to budget and save, so for now let’s keep it simple:
- Open a long term savings account – one you don’t intend on withdrawing from for the next few years. This will maximize the interest you can earn from your savings.
- Manage your expenses and save as much as you can each week.
- Don’t withdraw from this account unless you really need it.
- Watch your savings grow and enjoy the benefits of compounding interest.
The KiwiSaver withdrawal is an excellent way to save up for a first home deposit. Once you have signed up and start contributing, this becomes a forced savings strategy. Your contribution goes straight from your employer into your fund. Meaning you don’t have any chance of spending the cash. Your employer is also required to pay a contribution toward your fund at 3% of your salary/wages. If you are self-employed, you can still get the full benefit of this product. You will be able to withdraw all but $1000 from your account. This can be used for a deposit toward your first home, or vacant land that you intend to build on.
To be able to withdraw, you must fulfill the following conditions:
- be contributing for a minimum of three years;
- intend on living in the property for at least 6 months;
- the property must be in New Zealand
In the last year, first home buyers used their KiwiSaver withdrawal to contribute an average of $22,377.82 toward their deposits. This really can be a significant boost to your savings. If you have any questions about KiwiSaver, we can most certainly help you.
KiwiSaver HomeStart Grant
Another great perk to KiwiSaver is the First Home Subsidy or HomeStart Grant. This is a non-repayable subsidy to be used towards the deposit for your first home or the land to build on.
Here are the conditions:
- this must be your first home (if it is not, we may still be able to help you)
- you have been contributing the minimum amount (currently 3% of your income)
- have been contributing for at least three years
- you can only use the subsidy once
- the property you buy will have to be under a certain regional price cap;
- you must be 18 or older;
- your income for the last 12 months must be $85,000 or less for a single buyer or $130,000 or less for two or more buyers.
This grant will pay out $1000 for each year you have been contributing from three to a maximum of five years for an existing home and $2000 for each year for a new build. That means that you can get a maximum of $5000 for existing homes and $10,000 for a newly built house. You can also combine your subsidy with others and get up to a maximum of $20,000 towards a new build.
This section deserves an article of it’s own, but we will cover off the basics here. There are three key methods that can be used with family help.
In this situation, parents or close family members give a guarantee over the the loan. This is usually secured by a first registered mortgage over their residential property. A guarantee can be limited to a portion of the loan such as the deposit portion, or unlimited in which case the guarantors are liable for the entire loan.
This is not the most favorable option as it leaves the guarantors very exposed to the risk of the borrower defaulting. If a guarantee is used, it is best to limit the guarantee to a portion of the loan and agree on a term after which the guarantor is released from their obligation. As a guarantor you can also limit your exposure by allocating only a portion of your home as collateral (for example 20%) instead of putting up your entire home.
This is where part of the loan is in the name of the buyers as well as the people helping them (let’s say parents for example). So for example, 80% of the loan will be in the name of the buyers alone, and 20% will be the joint borrowing portion. This portion is treated as a separate loan and assessed on the financial position of all borrowers. The affordability is based on the buyers ability to service the entire loan. This portion of the loan is secured against the parents property as well as the property being purchased. The benefit to this method is that is reduces the parents exposure to only the deposit portion (joint loan amount).
A gift is simple – parents or close family members may gift a sum of money to the person buying the house. A gifting certificate must be provided with the financial transaction. This is to certify that the gift is not a loan and is non-interest bearing. The benefit of this method is that there is no on-going obligation or risk to the person helping.
Welcome Home Loan
Many banks will require that you provide a deposit of 20% on your home purchase. This can be a real challenge for your first home. Enter the Welcome Home Loan. With this loan you can purchase a property with just a 10% deposit. Only select banks and lenders are used and this allows them to issue loans outside of their standard criteria. To be eligible, you must earn less than $85,000 as an individual, or $130,000 on a combined income.
There are plenty of methods to put together your deposit, each with some great benefits. Some methods can however come with risks. If you have any questions, feel free to contact us and we will explore all options available to help you assemble your deposit.