Getting your deposit together for your first home

Housing Market Written by Squirrel, Oct 28 2019

The first step to securing your first home is sorting out your house deposit. But for most of us, even thinking about that amount of money can send shivers up your spine! If you have money on the mind, don’t stress - there’s an abundance of ways to source a deposit, especially if it’s for your first property.

So, what are these magical ways to get funds together? Can you get government assistance? How does KiwiSaver even work? Let’s take a look at deposits, what support the government offers first home buyers, and a few other ways that you can pull your deposit together for your first home.

So, what’s the deal with deposits?

To put it simply, banks won’t lend the full amount required to purchase a home, due to the risk involved. As a result, banks require buyers to pay a deposit on their property in order to receive a loan for the rest of the house price. The deposit is your contribution to the purchase price and means that you will own a portion of the home.

This means you will then have a personal stake in the property, so the risk is reduced for the lender. Generally speaking, the larger your deposit, the more likely the bank is to approve your loan.

When should you start organising your deposit?

It’s easy to get wrapped up in the excitement of scanning house listings online and rummaging through wardrobes at open homes, but at what point do you actually need to sort out your deposit? This is completely dependent on you and how fast you’re wanting to buy a home. It can also depend on the method of house sale you’re working with, as details can change slightly.

If you have a set budget and are serious about getting on the property ladder, it’s never too early to start asking for advice and planning for your deposit. Basically, you won’t be able to buy the property if you don’t have a deposit ready, so getting your ducks in a row first is wise. It’s also worth noting that in New Zealand, it is standard practice to pay the seller a 10% deposit when you exchange contracts but this amount is negotiable. It might also be a different amount to what your home loan lender requires you to have in your bank account, but you’ll still need to source the full amount that your lender requires.

Generally, you don’t need to pay your actual deposit until the contract is unconditional. If it’s a price by negotiation, there’s usually a period of time between signing the contract and having your offer accepted and going unconditional.

If you’re buying at auction and you win, then you’re unconditional the moment the hammer drops, and the deposit is required. (This doesn’t mean you’re handing over cold hard cash - it’s usually done via electronic transfer). Auctions are often after hours, so the deposit can be paid the following business day but it’s best to confirm with the real estate agent to let them know when this may happen.

Pre-approved finance

You can also secure conditional pre-approved finance before you start hunting for properties. This is something we strongly recommend to anyone serious about buying because it allows you to move quickly when you find a house that you like. Pre-approval generally lasts for three months, and it can usually be extended if needed. Conditional pre-approval will likely be required if you’re wanting a home loan to purchase a property at auction.

Who do you pay your deposit to?

Although your lender dictates how much deposit is required, you don’t actually pay the money directly to them, but to the vendor (or agent) instead.

When you go unconditional, you’ll pay the deposit to the vendor’s real estate agent who would then hold the deposit in a trust account until settlement. Or, if there’s no agent involved, you’ll pay it straight to the vendor. At settlement, you will be required to pay the remainder of the purchase price and this is when you will officially own the property. This normally happens one to four months after the sale and purchase agreement is signed, but it does vary between sales and should be outlined in your contract of sale.

How do you pay your deposit?

It’s best to ask the agent or vendor how they would prefer to receive your deposit, especially if you plan to purchase at auction and need to make payment in a hurry.

The most common way to pay it is by electronic transfer in a branch of the bank you bank with. This is because the deposit amount is larger than the maximum transaction allowed via internet banking. Personal cheques aren’t a common sight these days, but they are also an acceptable way of paying a deposit.

How much do you need for a deposit?

The truth is there is no magic number. What a lot of people don’t realise is that the size of a deposit for a first home can vary widely between buyers. Traditionally, a 20% deposit has been touted as the ideal minimum. Because the banks see it as less risky, deposits of 20% or more avoid low equity fees and generally guarantee you access to their most competitive rates. But the reality is, saving that kind of money can be near on impossible (Auckland houses prices, we’re looking at you). The good news is there are plenty of ways to borrow more than 80% of your property price if required.

We often work with 10% and if you’re good with money and on a decent income, we may also be able to work with deposits as small as 5%. Keep in mind that borrowing more than 80% of the purchase price is more of a risk to the lender, so it comes with costs. Larger deposits generally result in cheaper mortgage rates, so we recommend trying to source together extra funds prior to committing to a larger loan. Read on to see how you can get the deposit together.

Ways to source your deposit

Now that we’ve covered the ins and outs of how deposits work, it’s time to dive into the good stuff. Other than chipping away at your savings every week, how do you actually get the money together for a deposit?

Savings

There’s no escaping it, old fashioned savings are crucial when it comes to buying your first home. Sure, there may be grants and loans you can apply for, but the banks will want to see proof that you’ve saved at least 5% of the house value. Having savings to lean on also means that you can cover more costs and pay less interest in the long run. Plus, there are more costs involved in buying your first home than just the deposit, so you’ll need to have a little pot of money put away for those too.

Saving money isn’t a quick fix, so it’s best to start as soon as possible. (Yeah, thanks captain obvious). Here are a few of our top tips to get you started:

  1. Set a savings goal.
    Identify the price range you want to buy in, work out how much you would need to pay for a deposit and work towards that sum.
  2. Use a budgeting tool.
    There are a range of fantastic budgeting tools online for free. Take advantage of them and work out where you could be saving.
  3. Set up an automatic transfer.
    Treat your savings like any other bill. Starting an automatic transfer takes the hassle out of remembering to save and will help you resist the temptation of overspending.
  4. Consider opening a secondary savings account.
    If you know that you’re likely to dip into your savings, try putting it at an arm’s length and opening a secondary account.

First Home Loan

Housing New Zealand offers a First Home Loan scheme for eligible New Zealanders. If eligible, you can borrow up to 95% of the purchase price for a house, as long as it doesn’t exceed the designated house price cap for the region you’re buying in.

There is a wide range of criteria that first home buyers need to meet to apply for this loan, including:

  • Income cap - for this loan, there is a maximum annual income of $85,000 (before tax) for 1 person, or a combined maximum annual income of $130,000 (before tax) for 2 or more people.
  • Minimum deposit - you will need to have already sourced a minimum deposit of 5% for the home you are wanting to purchase.
  • Bank lending criteria - before any loan can be made, you will also need to meet your bank or credit union’s lending criteria. This generally looks at your level of debt, credit history and financial ability to repay the loan.
  • House price cap - the price of the home you intend on purchasing must be less than the regional house price cap.
  • First home buyer - you must be purchasing your first home or deemed in a similar financial position to a typical first home buyer. You also must live in the home you are buying.

KiwiSaver First Home Withdrawal

If you have been a KiwiSaver member for at least three years, you may be able to withdraw your savings from your KiwiSaver account to help purchase your first home. This option is for first homes only, not investment properties, and you need to be planning on living in the house for at least six months.

KiwiSaver HomeStart Grant

As well as withdrawing KiwiSaver contributions, you may also be eligible for a KiwiSaver HomeStart grant.

There are two HomeStart grants that you may be entitled to:

  1. $3,000 - $5,000 grant for existing homes
    KiwiSaver members wanting to purchase an existing property are entitled to $1,000 for each year of your KiwiSaver membership, up to 5 years per member. While grants can be combined, the total amount that multiple members can apply for is $10,000 for a single dwelling.

  2. $6,000 - $10,000 grant for new homes
    If you plan to build or purchase a new property, or purchase land to build on, the HomeStart grant is effectively doubled. This equates to $2,000 per year of KiwiSaver membership, up to 5 years per member. The total combined amount that multiple KiwiSaver members can apply for is $20,000 for a single property.

The Bank of Mum and Dad

The easiest way to get your deposit sorted (and one that we often arrange for our first home buyers) is asking your parent/s to act as a guarantor. If your parents are financially stable and still working, they may be able to guarantee a portion of your 20% deposit. This would be secured over their property or a term deposit, acting as a ‘hold’ until you’ve repaid the guaranteed portion. (They don’t have to actually hand over any cash). This way is especially beneficial because guaranteed home loans have no fees and open the door to fantastic interest rates, saving you money on your loan.

Let’s talk!

Buying your first home is exciting but as we know, it can also quickly become overwhelming, especially when you start talking numbers. If you’re finding yourself bogged down with information, we’re more than happy to help. We can give you a hand with working out how much you can borrow and what grants and loans you’re eligible for. We’ve even got a free First Home Buyers Guide with all the top tips and tricks for getting your foot on the property ladder.

If you have any questions, or you simply want to talk it through, get in touch with the team and we’ll be happy to chat.

We can help. Have a chat to one of our advisers.