Deposit For Your First Home
Purchasing your first home is not easy but it possible with a 5% deposit. For many first home buyers, dreaming of homeownership seems almost impossible
Most banks you speak with are most likely say “NO” that you require a larger deposit. However, some banks and mortgage advisers may suggest the First Home Loans scheme. This is available with some banks and is backed by the Government through Kainga Ora.
What You Need To Know About The First Home Loan Scheme
With the First Home Loan Scheme, purchasing your first home with a 5% deposit is deemed possible. This means that getting into your first home should be much easier, however, their are criteria’s you need to meet first to qualify.
Major banks have decided not to offer this. Only a few first home loans are issued by selected banks and other lenders, and underwritten by Kāinga Ora. This allows the lender to provide loans that would otherwise sit outside their lending standards, so there are limited banks that even know what is required to get these loans approved.
Co-Ownership
Co-ownership with property
Many New Zealander’s have not heard about co-ownership, although this has been around for years. It is a known option in other parts of the world and is used in Britain with many recent arrivals knowing how it works and quite a few have used it to get into their first home there.
This is a way to get into your first home when you do not have a large deposit.
Originally, co-ownership was done through a co-ownership agreement where you would enter with a family member (normally a parent) where the other party may have the equity that allows you to buy a property, and their reward is to share in the gain of the value.
As a mortgage adviser, I have been helping people get into their first home using this option, but rather than entering into a co-ownership with a family member, there are companies that offer this as a financial product which is known as a formal co ownership agreement.
Only a few mortgage advisers have access to the co-ownership option
The key criteria to be aware of are;
- You must have a minimum of 5% deposit – this can include your KiwiSaver withdrawal, any First Home Grant and of course any savings that you have. You can have some gifted deposit too, but they really want to see that you have been able to save your deposit yourself.
- You need to be able to afford the repayments – your adviser can help with working this out. The funding is done with a non-bank lender and therefore the criteria is not as tough as the banks, but there is still a responsibility to ensure that you can afford the repayments. Of course this will be important to you as well.
You can have some blemishes on your credit check and other debts too, but these are assessed on a case by case basis. The adviser will be able to help present this to the lender and we have had good success with some poor credit, poor account conduct and people with quite a lot of short-term debt.
Co-Ownership and How The Numbers Work For Co-Ownership
This is a scenario that we sent to someone recently who only had a 5% ($30,000) deposit. (This goes to prove that you purchasing your first home with 5% deposit is possible).
So you have a deposit of $30,000 and therefore with borrowing of 95% you could purchase for $600,000
Unfortunately at the moment the banks and even non-banks are not lending to 95% but we have an option with one lender and shared ownership.
This is how the finances work;
| Purchase Price | $600,000 | |
| Less Your Deposit; | ||
| Cash Savings | $30,000 | $30,000 |
| Therefore Required: | $570,000 | |
| Funded by; | ||
| First Mortgage Finance 1st | 80% | $480,000 |
| Co-Ownership by YouOwn | 16.7% | $100,295 |
| Less Fees | $10,295 | |
| $570,000 |
This is funded using a 1st mortgage provided by a non-bank mortgage provider and a co-ownership by YouOwn.
The interest rate for the non-bank mortgage providers range from about 3.39% to 6.75% and YouOwn have an equity charge of 4.95%
That means the repayments will be approx. $595 to $815 per week depending on your situation. This is made up of the non-bank mortgage provider at approx. $500 to $720 weekly and YouOwn at $95 weekly.
We currently have three options for the 1st mortgage and they range in
Comparing This To Bank Funding
Comparing to bank if they could approve the loan;
ASB currently have a 2-year rate of 2.69% (as at 16th October 2020) plus add a low equity margin of 1.30% so if you chose this fixed term you would be paying 3.99% so the repayments for a 95% loan ($570,000) would be approx. $630 per week.
ASB typically charge a loan processing fee of $150 plus require a valuation costing $700-900 +/- depending on location etc.
Co-Ownership Often Is More Expensive … BUT
As you can see the illustration of the co-ownership concept that we have provided may be more expensive, but it is a solution.
We expect that it is cheaper than waiting and saving, especially with house prices increasing as they are.
Getting 100% Ownership
Also you need to be aware that with co-ownership you will want to buy the remaining share from YouOwn in the future.
This is generally done after 5-years, and they make their money from the expected increase in value and this can be explained in more detail that will be suitable to your situation.
In this scenario they have a 16.7% share of the property worth $600,000 so YouOwn’s share = $100,295
If the value of the property is worth ‘say’ $800,000 in 5-years then the YouOwn share is now worth $133,600 (16.7%) so an increase of $33,305
Of course your share (83.3%) has increased by $166,600 too!
Purchasing Is An Option With Co-Ownership
The best option is getting a mortgage with a bank or a non bank lender, but reality is, in many cases this is not possible.
There are four main reasons for this;
- Low Deposit – if you have not been able to save a big enough deposit then the banks and non-bank lender might not be prepared to give you a mortgage.
- Hard to Prove Income – the banks criteria for proving income can be tough especially for self-employed people. Some non banks are better but they tend to require a larger deposit which you may not have.
- Too much short-term debts – the banks do not like to see too much short term debt when they are assessing an application. You may have great repayment history and be quite okay with affording the payments, but the banks have rules on how much debt you can have and they also need to factor on those repayments plus the new mortgage repayments. We can sometimes consolidate some debts into the mortgage when we do co-ownership arrangements, depending on the deposit that you have available from your KiwiSaver, any First Home Grant and of course your savings too.
- Some Credit Issues – sometimes past credit issues will mean that the banks cannot approve your mortgage. Again, some non bank lenders are not quite so strict, but they will still need your application presented to them well.
Many people struggle to meet the banks criteria, and if you don’t fit the standard criteria, banks will say “no” to you. They are not looking to provide finance to everyone.
Co-Ownership is quite popular around the world. In the UK they have had shared ownership schemes for some time now. These are Government backed schemes and they have helped a lot of first home buyers there. READ HERE.
They are not a new concept at all.
To See If This Could Work For You, Speak To An Adviser
This is not the best option for all people, but it is an option that can help you get into a home, where otherwise you may need to save for another year or two.
With the house values increasing, this will become very frustrating as it will be increasing at a faster rate than you could save. That’s when you really do see the value in buying a home with a co-ownership arrangement.
It may allow you to buy into the market now at the current house prices. Using the example about you are taking most of the ownership, but getting help with 16.7%.
You can live in the house and treat it as your own.
By agreement you are able to buy that 16.7% share at a later date when you are in a better financial position, and of course when the value has increased your equity in the house which allows you to get a good bank mortgage at lower interest rates.
You have missed out on the increased value on the 16.7% share, but you have got the gains from the 83.3%.
The best thing to do is to contact an adviser that can look at this for you.
This Option Is Only Available To Some Mortgage Advisers
This option is available to very few advisers that have the knowledge and access to this co-ownership option, and I can say that I can certainly help you with this option.
Because this is not your standard home loan, it does require the adviser to have a good understanding of how co-ownership works, and for this reason the access has been limited to a select group of advisers.
If you are looking at purchasing your first home with a 5% deposit, it is possible. Contact an adviser now to discuss your options.
