An important decision for many first home buyers is choosing between buying a home with a low deposit or waiting a few years to save up a bigger deposit. While low deposit lending means you could be charged extra fees or incur higher interest rates, waiting to save up a bigger deposit could mean you miss out on your preferred property or that property prices increase to a level that you can no longer afford. If you have to choose between low deposit lending or saving a bigger deposit, here are some things to consider.
Weighing up the options
Prospective home buyers deciding between buying a first home with a low deposit – a deposit that is less than 20 per cent – or holding off in order to save a bit more will need to consider two important factors:
- How much extra you may have to pay in low equity fees or higher interest rates.
- How the property market is performing and whether house prices are going up or down at a steady or fast pace.
What are Low equity fees and low equity margins?
Low equity fees and low equity margins are charged by lenders to borrowers with a deposit that is less than 20 per cent.
A low equity fee (LEF) is a one-off charge that is calculated based on the value of your home loan and the size of your deposit. It can either be paid up front by the borrower or added to the home loan and paid off over time. If you add it to your home loan, remember the LEF will incur interest rate charges over the life of your loan, making it more expensive.
A low equity margin (LEM) is an interest rate percentage that gets added to the interest rate your lender charges you if you have a deposit that is less than 20 per cent. The LEM will remain in place until your loan-to-value ratio reduces to less than 80 per cent. To have the margin removed, pay off your home loan as quickly as possible to get your loan to value ratio below 80 per cent.
If your deposit is less than 20 per cent, there are some ways you can increase it without having to wait until you save up enough. Here’s some more help for first home buyers with tips on what you need to know and how you can add to your deposit.
How is the property market performing?
Another important factor to consider when deciding between buying now or waiting, is how the property market is performing and what the future economic outlook is.
If house prices are rising at the same level they have done for the past few years, then getting into the property market sooner – and buying with a low deposit – makes good financial sense, because, in an environment where house prices are steadily rising, you’re having to constantly adjust how much your 20 per cent deposit will be.
Similarly, if house prices are dropping, you could land a bargain by getting into the property market sooner. Post-pandemic, the New Zealand property market appears to have turned, and in December 2022, the Real Estate Institute of New Zealand reported that house prices in almost every region in New Zealand have decreased year-on-year.
Into the new year and property data shows house prices are still declining, albeit at a slower pace. With properties taking much longer to sell across the country and a larger number of listings available, prospective buyers have both more choice and more time to decide when it comes to buying a home in the current property market.
Jen Baird, REINZ CEO said, “Salespeople around the country say sellers are tending to be more realistic and will usually meet the market through negotiation…” About borrowers, Baird said, “If you can make the finance work, this is a good time to be a buyer. More stock, less competition and prices continuing to ease will allow those who can get all the ducks in a row to buy well.”
Is now the right time to buy?
If you’re a first home buyer in New Zealand, weighing up your options between buying now with a low deposit or holding off to save a bit more, talk to a Mortgage Express branded mortgage adviser who can help you make an informed decision about which option is best for you. Contact Mortgage Express today to speak to a mortgage adviser in your area.
