20depositAll you need to know about Low Deposit Loans

As you may or may not know, getting a low deposit loan with less than a 20% deposit is a lot more difficult and more expensive!

However, all is not lost – loans with a minimum 10% deposit are still available, although these will cost you more in fees than pre-LVR restrictions.  New builds are allowed to be at 10% as they are exempt from the Lending regulations but you will still pay more for having the privilege of buying over 80%

Don’t forget you may be eligible for a Welcome Home Loan which only requires a 10% deposit.

Find more information here: http://www.welcomehomeloan.co.nz/

Why would I go for a low deposit loan?

You have saved $x which equals 10% of something.  You can get on the property ladder.  Yes, the loan repayments will be higher, but no lender will give you a loan if you cant service that loan.  Service means you paying out of your income and declared expenses.  At the beginning of a conversation with a Mortgage Adviser, that person will assess what you can service. That assessment is calculated at a higher rate because of the Responsible Lending code here in NZ.  We need to ensure that you can pay in the future when the rates do go up, so you are assessed now at that higher rate.

Fees for Low Deposit Loans

Since the tightening up of low deposit loans, Banks and Lenders have not only increased fees and interest rates, but now also apply application fees and no longer offer contributions for legal fees.

So what fees are you up for?

  • Low Equity Fee/Margin– The majority of lenders add a Margin (LEM) to your interest rate if you are over 80% lending.  80% to 90% starts at .25% up to 75% added onto the carded rate.  This is not the specials you see advertised.  eg. a 90% loan may be around 5.4% interest including that added .75%.
  • Legal Fees for any Purchase – these can vary from solicitor to solicitor – so it pays to shop around. It’s always good to be referred to a solicitor as well.
  • Registered Valuation – It is normal for banks to request a valuation for properties being purchased with less than 20% deposit. Also for private sales. Valuations can range from $650 upwards depending on the valuer as well as the value, size, and location of the property. This is ordered by the Mortgage Adviser once they know the lender that you are using.  You, the client then pays for the valuation, the valuer goes and does the valuation.  The Mortgage Adviser, you the client, and the lender all get a copy of the valuation. If the property is a newbuild, then a valuation called a Certifcate of Completion is needed at the end of the build to show its 100% complete.  This is cheaper and is a requirement from the lender to complete the loan

Don’t get scared off with all of this

It’s all how you structure the loan when you get your home Start off by woreking it down to 85% borrowing, then the added interest rate reduces.  Then get it down to 80% and then you are where you and the lender wants you to be – at 80% lending.

So, when it comes to getting a loan with a low deposit – it does pay to shop around, not only to find a lender who offers low deposit loans but also to find the best deal.

So what are Low Equity Fees and Margins all about?

Due to the high risk for banks of low deposit loans, they are required to take out a lenders mortgage insurance to minimise their risk. The low equity fee covers the cost of this insurance.

Tips for ‘Getting to Yes’ with the bank for loans with less than 20% deposit

While it’s fair to say that it is difficult in the current climate to obtain a loan with less than 20% deposit via a bank, you may still be able to obtain one if you have a very strong application. To have a fighting chance, applicants will likely need to match the following criteria;

  • Have excellent credit history
  • Preferably a saved deposit 
  • Demonstrate good financial management and have excellent account conduct (no unauthorised overdrafts, dishonours)
  • A very good surplus of funds once all expenses deducted
  • Hardly any debt 
  • Steady long-term employment/income

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