Not everybody has a 20% deposit when they buy their first home – and that’s why we wanted to highlight Jesse’s first home purchase with a low deposit of just 10%.
It proves that with the right preparation and a good mortgage adviser there is still hope.
Congratulations Jesse!
This week we had Jesse, who managed to buy a first home for $900,000 with home purchase with a low deposit of just 10%.
That meant the mortgage was a reasonable size at $810,000 and the repayments are $1,112 per week, but that’s not much different to what he was paying with his own rent (as a flatmate) of $375 per week and he now has two boarders paying $350 per week each too.
About Jesse’s Application
Jesse is single and on an income of $125,000 per annum.
This is great, but it also means Jesse was not eligible for the Kainga Ora First Home Loan scheme which is one of the more popular low deposit options in New Zealand.
There were also a couple of issues with the income:
- Bonuses – some of Jesse’s income is linked to bonuses, which many banks won’t use as solid income that can be used to prove what a borrower can afford.
- Company Car – although Jesse has a company car (which again is great financially), some banks don’t take that into account as extra income.
While generally the bonuses and company cars are not used by the banks, they do certainly help financially.
Is the Purchase Price of $900,000 Too Much?
As mentioned, Jesse purchased for $900,000 which might seem like a pretty expensive house for a single person and of course it is; however the good news was Jesse managed to also get a good discount on the property by buying a new build directly from a developer.
The new build is a 4-bedroom and was already completed with code of compliance just issued. Also because of the soft property market at the moment, Jesse was confident with the price paid. That was backed up too with a valuation that gave the property a market value over $50,000 more than what Jesse had paid for the property. This valuation gives a level of confidence with the purchase price, but also hopefully means that there’s already equity in the property, and so it’ll be a lot easier to get to the magic mark of 20% equity within a reasonable timeframe.
It was more expensive than what he started looking at, but having a larger 4-bedroom home makes it easier to have flatmates (boarders) and he was happy to have an extra one to help cover the extra cost.
Things are Not Always Simple!
Whenever a home is purchased with a low deposit the application will be a bit more challenging. In this case given the income had a bonus included, and combined with the size of the loan that Jesse was going to end up with the banks were always going to check this more carefully than normal.
Boarders – the good thing was the house was a reasonable size (plus 4-bedroom), and so the bank accepted that Jesse could have two boarders.
Credit Card – Jesse also had shown good money management and always paid the credit card off in full each month. As mortgage advisors, we managed to get that excluded from the assessment, whereas normally the banks would want that canceled or at least the limit reduced.
Student Loan – Jesse also had a student loan with just over $6,500 remaining, and while it’s interest free it was still costing $520 a fortnight. That meant it needed to be paid off in full before settlement, which Jesse was able to do from some savings.
It always helps to have savings outside of the KiwiSaver where you can access funds if needed.
The Home Loan Approval
Often when a home loan gets approved with just a 10% deposit, it would be done through Kainga Ora First Home Loans, who charge a 1.20% lender’s mortgage insurance premium, which gets tacked onto your loan. In this case, that would’ve amounted to $9,720.
As mortgage advisors, we were able to approach a number of lenders, and given that Jesse was not eligible for the Kainga Ora first home loan, which does have the lender’s mortgage insurance, we actually approached another bank which was able to offer Jesse a cash contribution of 1%, $8,100, and was not going to charge any low equity premium. This turned out to be a very good offer, which Jesse was very happy with.
To give some certainty as well, Jesse chose to fix a large portion of her loan for five years to give additional certainty with repayments, but also left a little bit on floating so that the loan could be paid off as fast as possible using the bonuses as they came through.
Ultimately, with the purchase price below valuation, and the ability to pay bonuses directly onto the mortgage, the aim is to try to have 20% equity within two years.
Was it the best time to purchase a house for Jesse?
We’ll only know if that was the case in the future.
However, the mortgage repayments after taking off the boarder income were $1,112, which as mentioned with the boarders it is quite affordable, and even if Jesse did decide to rent the whole house out at some date in the future, it would be okay.
He was happy to buy a first home purchase with a low deposit and especially as he managed to buy for a good price.
