How much deposit do I need for my first home?

Even though buying your first home is hard, Kiwis around the country still dream of owning their own little slice of paradise.

So most of us eventually reach the point where you ask the question: How much deposit do I need? How can I make my home ownership dream actually come true?

In this article we discuss how much deposit you need as a first home buyer, and some suggestions on actions you can take to make your ambition a reality.

How much deposit do I need as a first home buyer?

In an ideal world, as a first home buyer, you will have a 20% deposit.

But this is not always going to be the case.

Why? The median house price in the Auckland region is $1,253,175 (June 2021), $256,125 more than the next most expensive region, Wellington.

A 20% deposit on a house of this price is $250,650. Saving that amount of deposit as a first home buyer is often unrealistic.

Even if you have your sights set a little lower and are aiming for a cheaper property, a 20% deposit might just not be achievable.

For example, let’s say a first home buyer is looking at a small 2-bed unit in Auckland for $750,000. The deposit on that is $150,000.

The bottom line is house prices are expensive, especially in Auckland. And even the best saver might struggle to find the full 20% deposit.

Can I get a mortgage with a smaller deposit?

The short answer is often yes, you can.

But it is decided on a case by case basis and must be approved by the banks. But, in many instances, first home buyers can purchase with a 10% deposit.

In some very rare cases you might even be able to buy with a 5% deposit.

How does this work?

If you buy a property with less than a 20% deposit you are considered a low-deposit borrower.

The Reserve Bank sets Loan to Value Restrictions (LVR) that state how many of each bank's loans can be given to low deposit borrowers. Right now that’s set at 10% of lending.

Said another way, a bank can lend out 10% of its money to low-deposit borrowers. But they can also decide who gets access to these. Often, a bank will direct this money towards first home buyers.

For instance, in August 2021, over 40% of first home buyers purchased with less than a 20% deposit ... and the percentage of first home buyers purchasing with lower deposits is on the increase.

So, if you earn a good income, have low debt and good credit, you may be able to secure a lower deposit loan from the bank.

But these lower deposits come with stipulations. More on this below.

It’s not just about the deposit ... How much money do I need to earn?

Just this month (October, 2021) BNZ announced to brokers it will be implementing a debt-to-income ratio.

This ratio further restricts the amount of debt new borrowers can take on because it’s directly influenced by the amount of income they are bringing in.

For example, BNZ is bringing in a DTI of 6x, which means a person/couple wanting to take out a mortgage of $800,000 will need to be earning $133,000.

Now, while you should be aware of this debt to income ratio, it is important to note that the Reserve Bank has yet to implement a blanket rule for all banks to follow suit.

Only one other bank currently has a fixed DTI. That’s ASB, who has had a DTI ratio of 7.5x for the past year.

Every bank will have its own servicing calculations that dictate how much you’re able to borrow depending on your income. So don't just multiply your income by 6 and think that’s the maximum.

But you will need to be aware that you can’t necessarily just multiply your deposit by 10 (i.e. if using a 10% deposit) and think that you’ll get a loan – no questions asked.

This is where it is useful to speak to a mortgage broker in order to determine which bank to apply to in order to maximise how much you can borrow.

What happens if I use a low deposit loan?

As a first home buyer with less than the stated 20% deposit you will be classed as a “low equity margin customer”, which means your home loan will be classified as a “high LVR” loan.

It sounds obvious, but when you are a “low equity margin customer” you are charged a “low equity margin” on your home loan.

This is an extra bit of interest that your bank charges. And yes, by extra we mean on top of and added to the rates you see advertised.

These margins typically range from 0.25% up to 1.5%, depending on how small your deposit is.

But as a general rule of thumb, the lower your deposit, the higher your interest rate will be.

Banks face higher risk and cost when they offer low equity loans, especially to a first “untested” borrower, so they pass both of these on to you in the form of additional charges.

So, while a lower deposit may help you get on the ladder sooner, it does incur some costs.

Help me out ... what are some of the ways I can get on the ladder?

Samantha Morrison, a property partner with Opes First Home, says the biggest issue she sees first-home buyers facing is they just don’t have enough money to secure the deposit.

“Despite even the best of savers ... they might have $80,000 saved, all by themselves – it’s still not enough, especially in Auckland,” she says.

A couple might struggle. As a single person without family help it’s becoming increasingly hard.

But there are ways you can get “creative” to help you onto the property ladder.

For example, you can get parental help or apply for a First Home Grant. Of course, this does come with limitations. For instance, if you want to access the First Home Grant in Auckland, you have to find a New Build home at $700,000 or under.

Tactic #1 What’s better for first home buyers? Existing properties or new builds?

Buying a New Build off the plans can be an attractive idea for first home buyers for two reasons.

Firstly, when you purchase a New Build you lock in a property at today’s price, but you may not have to pay all the money for the house until your settlement date, which could be 2 years away.

This can be attractive for first home buyers who want to purchase with a 20% deposit, but don’t have all of the money just yet.

How? Often you will secure a New Build with just a 10% deposit. Then you pay the rest of the deposit once the property is built.

By this we mean you pay 10% as a down payment initially with the other 10% deposit paid at settlement.

To give an example, let’s say you buy a house off-the-plans in 2021 but the settlement date isn’t until 2023. And let’s say you plan to use a 20% deposit.

Well, there’s a two-year gap between the deposit payments. So pay the 10% now, and pay the other 10% in two years at completion.

Although, first home buyers beware … don’t fall into the trap of thinking the 10% is your whole deposit if it isn’t, and you actually need to come up with more money once the property is complete.

The second benefit of going for a New Build for your first home is that you get to lock in today’s price. So when you purchase a New Build you’re buying it in today’s market.

If property prices go up over the construction timeline you’ll have already locked in your price. In some ways, you’re already on the property ladder even though you haven’t settled on your first home yet.

Tactic #2 consider an equity share with Kainga Ora

The First Home Partner is a brand new scheme to help first home buyers with their deposit.

Basically, Kainga Ora contributes up to 25% of the purchase price for your first home in exchange for being an equity shareholder in your property. The plan is you buy them out later on down the line.

Those in the business reckon it’s an idea that has a lot of merit.

Because even if you buy them out in 3 years, you’ve had the benefit of living in your own home having only paid a smaller deposit.

To be eligible for this scheme you have to meet the criteria. And the cap for annual household income is $130,000 across all income earners. So this may cut you out of the running.

For a single person it’s great news, but couples will tend to be over that income limit.

What ways can I build my deposit?

Once you know how much of a deposit you need, the question turns to how you can start to build your deposit. Here are the 5 building blocks to get that deposit up –

Building Block #1 KiwiSaver

First home buyers, you can withdraw from your KiwiSaver to use as a deposit.

But to be eligible you must:

• Be planning to buy your first home
• Be planning to live in it for 6 months (minimum)
• Be a KiwiSaver member for 3 years (minimum)

Just be aware that you have to leave $1,000 in your account when you withdraw. So if you have $26k in your KiwiSaver account, you can only take out $25k.

Building Block #2 First home grant

Under the First Home Grant you and your partner can get up to $20,000 from the Government for your first home.

If your household income is less than $150,000 and you are buying a property less than $625,000 (existing) or $700,000 (New Build) in Auckland you may be eligible for this grant.

This is for KiwiSaver members, and is an extra $1000 for every year you’ve been with KiwiSaver up to a maximum of 5 years ($5,000). This is available per person.

The amount you get from the grant doubles when buying a New Build.

To be eligible you must:

• Plan to live in the property you buy for 6 months (minimum)
• Contributed 3% of your income to your KiwiSaver for 3 years (minimum)
• Earn under $95,000 (for a single person) or $150,000 (for a couple)

Building Block #3 First home loan

If you only have a 5% deposit available you could apply for a First Home Loan through Kainga Ora, so long as you meet the rest of the criteria.

This is where you are able to access a low deposit loan – and the Government will pay the Lenders and Mortgage Insurance for you. Also, any First Home Loans don’t count under the LVR restrictions.

That means banks are more likely to offer you finance at these lower deposit levels.

The maximum income you can earn to access these Government-backed loans is $95,000 (for a single person) or $150,000 (for a couple).

However, there is a “house price cap”, which means you are only eligible so long as your property is under this price.

The cap is different per region. Head to the Kainga Ora website to check out what the cap is for your region.

Building Block #4 Bank of mum And dad

If your parents own their own home they might be able to lend or gift you some money from the equity within their own property. They can also gift you money if they have the savings.

But, if you go down this track, just remember that at least 5% of your deposit needs to be “genuine savings”.

It could be money you’ve saved; money from selling your car; the bonus you saved from last year; or KiwiSaver funds.

Money from your credit card doesn’t count. So, don’t try and move money around in your accounts. You won’t fool the bank.

As an example, let’s say you want to purchase a home worth $650,000 and your parents are willing to give you money to top up your deposit.

In order to get approval from the bank, you will need at least $32,500 in ‘genuine’ savings to get the loan. Your parents can’t just give you the other $32,500 to get up to a 10% deposit.

Before you say “my parents aren’t rich” or “my parents won't help me” … that’s OK. Not everyone can get help from the Bank of Mum and Dad … if this isn’t available then you’ll use some of the other building blocks on this list.

Building Block #5 Save and/or sell

There are also the good old faithful ways of getting extra cash.

You can put aside some of your salaries as savings or you can sell some of your assets.

For example, if you and your partner both have a car, why not sell one for cash?

Or there are other ways. Think about downsizing to a smaller home in the interim. Can you move in with your parents? Not everyone can, but for some people it’s an option.

Can you give me an example of how this all works?

Let’s play out all these ideas in a real-world example.

You and your partner find a property worth $800,000. A 10% deposit for this house is $80,000, but remember you need to have 5% or $40,000 of this as genuine savings.

In your KiwiSaver you have $25,000 available each ($50,000 combined), which meets the genuine savings threshold.

But you need $30,000 more.

You’ve worked out yourself you can’t get a First Home Grant (because the property is over the house price cap), so you decide to sell one of your two cars for $8,000.

Now you need $22,000.

Both sets of parents tip in $11,000 each as an interest-free loan.

You now have the minimum to apply to the bank for a loan.

Go for it!

What should I do next?

So how much deposit do you need for your first home? Well, it depends. It depends on what you buy and whether you can use a 20%, 10% or even a 5% deposit.

Often, first home buyers will either want to learn more or start talking to someone who can help give advice on their specific situation. So here are three steps you should think about next:

#1 Watch – our first home course. This will take you through the fundamentals of buying your first home.

#2 Talk – to me, Samantha, if you really want to make this happen. Opes First Home can guide you through and project manage the process of buying your first home.

#3 Get in touch – with a mortgage broker. If you would like to find a mortgage broker to chat with about your situation here are our top 10 recommendations.

Good luck, this could be the start of a really exciting journey.