When considering your first home purchase, it’s essential to understand the financial aspects, including the down payment required. Most traditional mortgage providers typically request a down payment of at least 20%. Going below this threshold raises concerns for lenders due to the heightened risk of potential repayment issues. Even if you are deemed capable of managing the mortgage payments, lenders tend to mitigate their increased risk by imposing a higher interest rate. This extra interest charge is known as the ‘low equity margin’ (LEM) and typically amounts to an additional 0.75%. Some non-bank lenders may opt for an initial one-time fee or a combination of both approaches.
Furthermore, the Reserve Bank of New Zealand imposes restrictions, allowing only a limited percentage of new mortgages for existing homes to have a down payment of less than 20%. This restriction does not apply to loans for new construction or apartments.
The government introduced the First Home Loan programme to facilitate homeownership for individuals with lower deposit capabilities. This initiative enables borrowers to secure mortgages with a minimum deposit of just 5%. The unique feature of the First Home Loan programme is that Kāinga Ora underwrites these loans, thereby mitigating the perceived risk associated with low down payments. Consequently, this translates to no higher interest rates or upfront fees solely due to the lower deposit amount.
Who Qualifies for the First Home Loan?
The government has made this programme accessible to incomes capped at specific thresholds. If your income exceeds these limits, alternative options exist, such as non-bank lenders, but be prepared for higher interest rates. The maximum allowable income for the government-supported First Home Loan are as follows:
- $95,000 before tax for individual buyers
- $150,000 before tax for individual buyers with one or more dependents
- $150,000 combined income before tax for two or more buyers
Additionally, you must provide a down payment of at least 5% of the home’s purchase price, and you must either be a first-time homebuyer or have financial circumstances typical of a first-time homebuyer.
Previously, there were restrictions on the maximum home price that qualified for First Home Loans. These price caps were eliminated after Budget 2022, making more homes available to First Home Loan applicants.
To ensure your financial stability, you must meet the typical lending criteria. These criteria encompass factors like your ability to make repayments, whether the loan aligns with your financial situation and future objectives, your financial track record, and your age (you must be at least 18 years old).
Furthermore, there are additional general guidelines established by the government, which include
- You must cover the cost of lenders’ mortgage insurance (with a premium of 0.5% of the loan) and any other applicable fees; you can include this in the loan.
- The home must be your primary residence; it cannot be an investment property.
- You cannot own other property except Māori land.
- You must be a New Zealand citizen, permanent resident, or resident visa holder who primarily resides in New Zealand.
Not all participating lenders permit using a First Home Loan for building a new house, so it’s essential to check with your chosen lender if that’s your intention.
How to Apply for a First Home Loan
Applications for First Home Loans are submitted directly to the selected lender, not through Kāinga Ora. Each First Home Loan lender will assist you in understanding their current affordability criteria and the government’s regulations. Once you’ve chosen a lender, they will guide you through the application process to ensure it’s complete and to prevent unnecessary delays.
Increasing Your Deposit for a First Home Loan
Several methods can help you raise your deposit to meet the 5% minimum requirement or go beyond it to enhance the affordability of your home loan and repayments. While your lender can offer more detailed guidance, here are some examples:
- First Home Grant Administered by Kāinga Ora, this government grant provides financial assistance, offering $3,000, $4,000, or $5,000 depending on your KiwiSaver contributions over three, four, or five or more years. These grant amounts double, potentially reaching up to $10,000 for new builds. If you’re purchasing a home with someone else, you can both apply for a First Home Grant. Remember, there are price caps for existing and new-build homes in various regions of New Zealand, limiting the purchase price for which you can use this grant. The income limits for First Home Grants are the same as those for First Home Loans.
- KiwiSaver First-Home Withdrawal If you’ve contributed to KiwiSaver for at least three years, you may be eligible to withdraw your savings to finance your first home purchase. However, you are typically required to maintain a minimum of $1,000 in your KiwiSaver account.
- Gifted Funds You don’t necessarily have to accumulate the entire deposit. If someone is willing to provide financial assistance for your deposit, lenders may require a document stating that the funds are a gift, not a loan. This approach ensures that the lender’s assessment of your borrowing capacity remains unaffected.
It’s critical that you consult your chosen lender to explore these deposit-boosting options further and get tailored advice for your situation.
If saving for your deposit feels a little out of reach, don’t hesitate to contact me for some financial guidance. With a few budgeting and savings strategies in place, your nest egg will start to accumulate in no time.