The new 20% deposit rules – What do home buyers need to know?

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Reserve Bank has recently announced new lending restrictions. What does this mean for you as a purchaser? What are the key things you need to be aware of to help you buy in light of the new rules?

What are the new rules?
Previously you would have been able to borrow up to 90%, sometimes even more of a property’s value. Now, only 10% of a bank’s loans can be more than 80% of the property’s value. This means that most home buyers will have to have a 20% deposit to qualify for a loan.

Who will this affect?
Anyone applying for a new home loan will be affected, regardless of whether this is your first home or not. However those not already in the property market will be hardest hit.

For example - a house purchased for $400,000 will now require a deposit of $80,000. There are a variety of ways you can make up that 20% deposit and anyone currently looking to purchase property should consider all of their options.

What are the critical things prospective buyers need to be aware of?

Know each bank’s terms
First and foremost, when applying for loans, it pays to know what each bank is offering to find what’s right for you. Some banks charge higher interest rates, others have higher set-up fees. It helps to understand the fine print and the total costs. 

The banks are also prioritising who qualifies for a low equity loan differently – some by the value of the customer, others are prioritising first home buyers, so check out each bank’s lending policy.

Check the status of pre-approved low equity loans
If you already have pre-approval for a loan with a deposit of less than 20% from your bank, be sure to double check its status with your lender before you make an offer. It is crucial to check that your existing pre-approval is still valid. Ask the bank things like:

a) Whether or not the bank will extend this pre-approval if you don’t purchase a property in time,
b) If there are any specific conditions that need to be met,
c) Do you need to have completed settlement, signed the loan documents or just have an accepted offer before the pre-approval expires?

Understand KiwiSaver withdrawal requirements
Many first home buyers have the option of dipping into their KiwiSaver or other savings schemes to buy their first home. Not everyone can withdraw from their KiwiSaver. It depends on your provider and you need to have been a member for a minimum of three years.

The KiwiSaver approval process can take longer than standard loan arrangements and this should be taken into account when deciding on the dates between going unconditional and settlement. You cannot apply for the KiwiSaver first home withdrawal until an agreement has gone unconditional.

Secure loans or gifts from family members
Your family may be in a situation to lend or gift you money towards the deposit. This can result in problems in the future if there are rifts in the family, relationship breakdowns and subsequent relationship property disputes. Again, it is recommended that all parties obtain independent legal advice to ensure that the proper structures are in place to protect all parties.

Obtaining a guarantee
You may be able to secure a new mortgage – sometimes with a better interest rate or lower fees if you can find someone to guarantee your loan. The guarantor must obtain independent legal advice as there are major risks involved for them.

Investigate second tier lenders
If you are unable to secure a loan through the major banks, you can try a second tier lender. The interest rates and fees are often higher than the major banks, reflecting the greater risk involved with low equity loans. The terms and conditions of the loans are often more demanding, so it is vital you understand them fully.

The road to owning your dream home can be stressful but skilled advice can make the process easier and ensure that your investment is properly protected.

For further advice on any of the above, or for assistance with your residential conveyancing, contact property lawyerWade Hansen by phone on 09 837 6885 or email wade.hansen@smithpartners.co.nz or Jennifer Edwards by phone on 09 837 6889 or email jennifer.edwards@smithpartners.co.nz