A bank mortgage is always the preferred option for homeowners, but it’s not always easy for a first-time buyer to get a mortgage with a bank, whether that be by going directly to a bank or to a mortgage advisor. There are a few reasons why this is the case.
Firstly, most banks require you to have a 20% deposit, and that’s because of the Reserve Bank rules that dictate that anything below 20% is deemed a low deposit home loan, and the banks are restricted on how much of their lending they can do where there is less than 20% deposit. That’s why banks will generally mention that a 20% deposit is required. The good news is that there are exceptions.
1: Kainga Ora First Home Loan
Banks can use the Kainga Ora First Home Loan option, and that requires a deposit of just 5% or anything above that. The Kainga Ora First Home Loan is exempt from those LVR rules that restrict the banks from lending.
2: New Builds
The other exemption is for new builds. A bank can offer finance on a new build, and in most cases, they will want a 10% to 15% deposit, although there are some options that may allow you to buy a new build with just 5% deposit too.
When you speak to your mortgage advisor, they will review your situation and determine what is best and what options you have. If you fit the Kainga Ora First Home Loan criteria then that might be the best option and your mortgage is still with the bank. But as mentioned, but not all banks use this program.
If you’re buying a brand-new house (a new build) then getting the finance from a bank might be an option too.
3: Low Deposit Bank Mortgages
At times the banks will have the ability to offer low deposit home loans when you don’t fit either of the exempt options – the Kainga Ora First Home Loan criteria or buying a New Build.
Choosing The Right Bank
If you are going to be getting your finance for your first home from a bank then you need to decide what is going to be the best bank for you. Some of the banks do offer special packages for first-time buyers, where you get discounted interest rates and a cash contribution. In some cases you will be paying either a low equity fee (LEF) or a low equity margin (LEM) when you have less than 20% deposit so you need to be aware of that and make sure that this is factored in when you are selecting which option to take. You also need to be careful and targeted on how you set up the loan structure, because ultimately, you want to make sure that you can get into a position of having 20% equity in your property as soon as possible.
FAQ's
What is a low equity margin?
When you’re borrowing money from a bank for a home loan and you have less than 20% deposit, you will be deemed as a higher lending risk for the bank. In the past, the banks used to get a specific lender’s mortgage insurance and the borrower would pay the premium for that: however, in more recent years the banks have self-insured for this risk and use a low equity margin (LEM) which effectively is an increase to the interest rate. Some banks have a flat LEM for anything over 80% lending, but most banks stagger these, so you might pay a certain amount if you are borrowing over 90%, less if you’re borrowing between 85% to 90%, and less again if you’re borrowing from 80% to 85%.
How can we get a low equity margin removed?
To allow the banks to remove the low equity margin (LEM) you need to increase your equity to 20% or more. It then comes down to the bank’s policy on how they do this, with some banks allowing it to be done midway through a fixed loan term, whereas others will only allow you to review the LEM at the end of a fixed term period.
You need to be aware of this before deciding on which home loan to take, as this can make quite a difference financially if you’re going to be delayed in when you can have a low equity margin removed. In addition, you should know what the bank require to remove it, as some require specific valuation methods to be used, where others might have a specific valuation published on the website.
If you do have less than 20% deposit and you are being charged a low equity margin, then you want to have a look at an accelerated equity calculator to see how long it might take you to build up to 20% equity. Using this calculator factors in both your repayments and the expected increase in property values. It also shows you a good way to structure a portion of your mortgage to accelerate the repayments on a portion that enables you to get toThat 20%, that magic 20% mark.
to get toThat 20%, that magic 20% mark. Do all banks offer the Kainga Ora First Home Loan option?
Unfortunately not all banks offer this, and therefore if you’re dealing directly with your bank it may not even be part of the conversation. There is a list of participating banks published on the Kainga Ora website (First Home Loan) and if you’ve got a mortgage advisor that’s experienced with lending for first-time buyers, then they will be able to give you advice on this too
give you advice on this too. Are you able to increase your payments so that you can get your equity increased sooner?
Most banks do allow you to pay more than the minimum repayment, but you need to be careful before you do increase your repayments, as you don’t want to be stuck on higher payments, especially if interest rates increase. Speak to your mortgage advisor, and they can explain how to structure your mortgage so that you can increase your repayments, and therefore your equity, without putting yourself at risk.