How much can you afford for a new home
Saving for a deposit
Generally, you’ll need a minimum deposit of 5% of the purchase price. If you have 20% or more as a deposit, that’s even better, as the mortgage lender won’t normally require mortgage insurance to guarantee your loan.
The larger your deposit, the less you’ll actually have to borrow and subsequently repay.
If investing however rather than buying your own home your borrowing arrangements may be completely the opposite; 40% deposit, interest only mortgage. Plan appropriately in conjunction with your adviser
Lenders Ideally require a 20% deposit of the purchase price. This is low risk for the lender to get their money back from the sale of security (mortgagee sale) as a last resort.
For owner occupied homes, lenders can approve loans with less than 20% deposit. –called “low equity” borrowers . Lenders can approve loans with as little as 5% deposit, although lending criteria is much tougher & more costly e.g. low equity fee / interest rate charge, no rate discounts or cash contributions offered.
At least 5% of the deposit needs to be saved (e.g. from KiwiSaver) with the rest coming from elsewhere (e.g. gifted).
For property investors, lenders require a minimum of 40% deposit (or equity).
How much can you borrow?
This is dependent on the different criteria of each lender. That can change on a daily basis. The following five key criteria determine how much you can borrow:
Cause
Character
Capacity
Collateral
Capital
For most lenders, an ideal borrower is one who has a good credit history, has a reasonable deposit and has an income that comfortably covers the mortgage payments.
You can borrow around 95% of the purchase price (or valuation, which ever is the lower), but will generally have to pay Lenders mortgage insurance (also known as Low equity premium) if your deposit is less than 20%.
Working out your budget
Having a budget helps to get a reasonably good feel for your income and expenses. At application time, the lender will want to see some of the details of your expenses, so working them out with your adviser before hand will speed things up.
The various mortgage lenders have their own formulas for working out whether they think you can afford the mortgage you are after. Your adviser will recommend the lender that most fits your situation, so that you are more likely to be approved.
You can help your affordability by paying off any loans or hire purchases and having a low limit on your overdrafts and credit cards.
FoxPlan Tip
Your adviser can often get you a ‘pre-approval’, which is an undertaking from the bank as to the maximum you can borrow. This helps you know what your price limit is from the outset, and can give you some greater weight in negotiating.