Buying Property with a Low Deposit

The world economy is still reeling from the effects of the Global Financial Crisis, and one of the major elements of this catastrophic event was a huge increase in lending on residential property by American banks to people who had a low deposit and low incomes. The increased lending fuelled property prices, and when the inevitable property crash occurred, financial institutions and borrowers were left facing huge losses, causing economic instability. To prevent such an occurrence in New Zealand, the Reserve Bank is considering putting restrictions on the amount of lending done by banks where the lending is more than 80% of the value of the property. This arrangement is likely to prevent banks offering second mortgages where the total borrowing is over 80% of the property value.

First home buyers will be most affected by these changes. The Welcome Home Loan Scheme supported by Housing New Zealand is a low deposit scheme which is excluded from the restrictions, however there are strict eligibility criteria for these loans.

Being a member of KiwiSaver gives a good head start towards finding a 20% deposit. After three years of membership you can withdraw your KiwiSaver funds, excluding the Government kickstart and member tax credits, for the purchase of a first home. You may also be entitled to a first home subsidy of $1,000 for each year of KiwiSaver membership up to a maximum of $5,000.

Another strategy is to ask your family to use their home as security for part of the loan. The advantage of this approach is that it enables your family to help you without having to give you cash for a deposit. It does, however, involve a certain amount of risk for your family as they will be relying on you to make the mortgage payments on time.