Low-Equity Lending

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What do you mean by low equity lending?

This is where you have less than a 20% deposit. A lot of people wonder whether it is possible to buy a house with less than a 20% deposit. It definitely is, but it is generally a bit harder and more expensive than if you have a 20% deposit.

First things first, you will hear the term LVR. This is loan to value ratio. It is basically how big the loan compared to the value of your house. An example:

House Value = $500,000

Deposit = $100,000

LVR = $80% or 20% equity/deposit in the house.

Secondly, how it is different having a 10% deposit vs 20% deposit?

  • The interest rates aren’t as good. The low advertised rates are available for people with more than 20% deposits. Most banks will charge a margin on top of these for low equity lending. This is different depending on how much the deposit is. Roughly:

15-20% deposit will mean you have a mark-up of around 0.25/0.3% to your interest rate

10-15% deposit will mean you have a mark-up of around 0.75% to your interest rate

So even having 15% makes it significantly cheaper.

A couple of banks charge this as a one-off fee rather than an ongoing adjustment to the interest rate.

  • Valuation – with less than a 20% deposit, typically the bank will require you to pay for an valuation of the property which you will likely have to order via the banks system.

 

  • Servicing calculations – the banks will usually require you to have a higher surplus leftover in your budget. This changes regularly.

 

So, lending in New Zealand with less than 20% is absolutely possible and can work really well, it is just key to be aware of the additional costs that you are up for.