Deposit Options

Finding the right path towards purchasing your first home can be confusing. You might of heard of government programs like – first home buyers grants, kiwisaver first home withdrawal or first home loans but don’t understand whether they apply to your situation.

Understanding how these programs work can be the difference between having to save for the standard 20% deposit compared to saving for a 10% d

It is important to note that while lenders typically allow you to borrow between 3 – 5 times your gross annual incomes you need to consider how much you can afford in repayments each month. Maximising the amount you borrow could put significant pressure on day to day finances and increase the amount of total interest you pay over the life of the home loan.

10% Deposit Home Loans
5% Deposit Home Loan
Guarantor
10% Deposit Home Loans

10% Deposit Home Loans

Getting onto the property ladder would as a first home buyer would be easier if you only had to save a 10% deposit home loan. The government has made this possible via their First Home Loan program.
In fact, if you meet the following criteria you may be eligible to successfully apply for a home loan with as little as a 5% deposit home loan.

First Home Loan

The criteria are listed below along with an easy guide to check at a glance if you are eligible to apply.

Income cap – You can have a maximum yearly income of up to $85,000 (before tax) for 1 person. Or a combined maximum yearly income of $130,000 (before tax) for 2 or more people.
Minimum deposit – You will need a minimum 5% of the purchase price of the house you are wishing to buy.
House price cap – The price of the house you are buying with a First Home Loan must be less than the regional house price cap.
First home buyer – Or a previous home owner, in a similar financial position to a typical first home buyer.

For more information visit Kāinga Ora – Homes and Communities.

5% Deposit Home Loan

Most lenders still need borrowers applying for their first home loan to come up with the first 5% of the purchase price as a saved deposit. This 5% should ideally have been saved over the last 3-6 months.This saving could have been achieved in a New Zealand based bank account or even an overseas bank account.If the savings has been achieved in an overseas bank account or has come from other forms of savings instruments overseas,you need to establish a paper trail that is accepted by lenders.
Lenders may require additional information in relation to your savings history and your current employment. There may also be some restrictions on the type of property being purchased.
One option available to borrowers with a 5% deposit is to top it up by another 5% to make it a 10% deposit . The top-up can be by way of a gift from family or even a loan that needs to be repaid.As long as 5% is saved as required by the lender, the lender generally accepts the additional deposit as long as there is a straightforward explanation on the source.

Gifted Deposit

Contribution to the deposit from family members can be in the form of a gift or it can be an interest-free loan. The lender has to be informed of the source of the additional deposit.

You should talk to your accountant about the possible tax implications if you are gifted a deposit for you and the family member lending you the deposit. You should seek advice from your solicitor of the property relationship act and its effect on the gifted deposit. Your solicitor should also provide you with a Deed of Debt (if the deposit has been borrowed from family) that is generally acceptable to the lenders.

Guarantor

Close family members also have the option to act as a guarantor. It is important for the guarantor to be in a healthy financial position. They should currently be working or be self-employed and have enough equity in their property to be able to guarantee up to 20% Close family members also have the option to act as a guarantor. It is important for the guarantor to be in a healthy financial position. They should currently be working or be self-employed and have enough equity in their property to be able to guarantee up to 20% of your mortgage. The combined value of the deposit guarantee and their mortgage should be under 80% of the value of their property.
Once a guarantee of 20% is accepted, it is secured against the guarantor’s property. As a guarantor you do not need to provide any cash towards the property purchase but your property is used as security. The key is that the new loan is set up with the lender that holds your property.

What are the Risks for the Guarantor?

You could potentially lose your property if the new borrower is in arrears with their loan. It is in your interest to monitor the loan you have guaranteed. Lenders do not like to wait but it is quite common that the borrower is almost 2-3 months behind in their mortgage repayments before a lender will issue a formal arrears notice.

The lender should also keep you in the loop about this development. If you have been monitoring the loan, you will be aware of the situation and try to remedy it soon enough to avoid a mortgagee sale. It takes about 4-5 months of loan arrears before the lender takes the property to a mortgagee sale. Loan documents generally do not specify which property will be sold first at the mortgagee sale; the lender will sell the other property first as that property makes up most of the new loan value. Lenders normally will help find a solution before the mortgagee sale is reached, especially when there is a guarantor property involved.

However, after selling the other property, if there is a shortfall in the mortgage arrears (which by this time will include unpaid interest, legal and administration costs) the lender will ask the guarantor to make up for the shortfall.
How do you avoid this risk? We recommend talking with our insurance advisers in order to mitigate your risk and discuss your options.

What if I want to sell my house?

The guarantor’s property will have a mortgage secured over it which is linked to the other property. If you want to sell or need to sell your property, the lender can transfer the security to another property you may own, or you can use some of the proceeds from the sale of your property to replace the deposit guarantee.

How we can Help

We will ensure that the mortgage is manageable for the new borrowers. We cover possible risks for both you and the borrower. We work with the borrower towards reducing your guarantee within a manageable timeframe.

Second Mortgages Can Help

There are instances where the primary lender will allow a second mortgage to be registered against the same property. However, this is very rare given the current state of the market. In this situation, the prime lender supplies up to a maximum of 80% of the property value. While the second mortgage provides for up to another 10% while the borrower puts in the rest.

This kind of arrangement need not necessarily be an expensive one. If the second mortgage is competitively priced, this can be an affordable way of moving forward. Remember, the second mortgage has a short term (normally a maximum of 5 years) and comes at an additional cost to the borrower in terms of upfront fees and higher interest rates.

Applying for a second mortgage is a good possible option to consider when the main lender feels there is a risk in your loan proposal. Talk to us if you feel your profile needs this kind of arrangement.
For higher risk lending we sometimes use a prime lender for the first mortgage (the first mortgagee has first priority over the property), and arrange a second mortgage with a finance company. The first mortgage will be up to 80% of the property value for owner-occupied and 70% for investment property. The second mortgage then fills the gap all the way up to 90%. You will still need a 10% deposit home loan.

All lenders price for risk. The riskier a deal, the more you will pay. If you are borrowing over 80% you will typically pay an extra 0.50% and 1.00%. This applies to the whole mortgage.With two lenders involved there is no premium on the first mortgage. There is a large premium built into the second mortgage. Second mortgages cost up to 14% pa but you need to look at the overall interest rate and repayments before comparing to other options.

We structure the first mortgage as interest-only so that the more expensive second mortgage is repaid first. This keeps your increase in borrowing costs to an absolute minimum. We have found that the monthly repayments are not materially different from what you would pay normally.

Second mortgages can be repaid as quickly as you like including lump sums. So after six months, if the property value has increased above your purchase price, we can consider increasing the first mortgage to repay the second mortgage.

Benefits of a Second Mortgage

To start with, you can buy now versus save and buy later.

Second mortgages can be cost effective if set up properly as second mortgage providers generally have a higher risk appetite than the bank. They are often less pedantic than banks with their lending criteria. They will lend even if you are using a smaller deposit (you will normally still need at least a 10% deposit home loan).

The main mortgage relationship is still with the first mortgagee who is lending at prime rates (remember that the first mortgagee has to agree to the second mortgage). The First mortgage provider will almost always have a better product choice, pricing and accessibility than the finance company. The second mortgage should ideally be repaid rapidly reducing your interest costs.

Vendor Finance

Vendor finance is where the seller leaves equity in the property (as a second mortgage.) It is a loan and must be paid back. Ideally the vendor finance is charged at a market based interest rate. Vendor finance is trickier and only really works for people with no deposit but high incomes and no other debts.

From time to time we come across vendor finance deals. If you are interested let us know.
This kind of arrangement need not necessarily be an expensive one. If the second mortgage is competitively priced, this can be an affordable way of moving forward. Remember, the second mortgage has a short term (normally a maximum of 5 years) and comes at an additional cost to the borrower in terms of upfront fees and higher interest rates.

How Does Vendor Finance work?

You agree a sale price with the vendor which needs to be no more than a current registered valuation of the property. You only pay 80% of the sale price with the remainder treated as a second mortgage repayable over 5 years).

So if you buy a place for $650,000 we arrange a mortgage with a lender for $520,000. It is interest-only to keep repayments as low as possible. We then arrange the $130,000 vendor finance as a second mortgage that is fully repaid over 5 years. The vendor finance will have a commercial interest rate on it of say 6.00%-8.00% so can be a nice little earner for the vendor.

It is not for everyone, but if you are interested in looking at vendor finance options give us a call us to discuss. In the current housing market, some vendors are more open to exploring vendor finance. These vendors are generally holding stock that they need to offload. If you are considering vendor finance, it is essential that you get a good price, proper advice and make sure that you are not being sold a lemon.

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Banu Sidharth

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Abdul Osman

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