Lenders will commonly fund up to 80% of the house’s purchase price. Many will lend up to 90% if they feel you can handle the repayments and some will occasionally even lend 100%, but only if they are convinced that they will be able to recoup their money should it all go horribly wrong and they need to run a mortgagee sale. Lenders are also restricted by the Reserve Bank about the make-up of their loan portfolio. From 1 October 2013 only 10% of a bank's home loans may be for more than 80% of a home's value (previously it was 30%).
With very high percentage loans, lenders will often require a financially secure family member to be a guarantor. The costs of daily living and high house prices make saving a deposit difficult and these larger ratio loans are attractive to many, especially first-home buyers. Do be wary, though. The last thing you want is the stress of struggling to meet mortgage repayments or, worse, having your house repossessed.
Loans of more than 80% will usually incur extra costs. Banks will often insist upon the property being professionally valued and some may require you to take out mortgage repayment insurance should you become ill or lose your job. You may also be required to pay a low equity premium of up to 2% of the loan. The good news is that if you plan to rent out some of the bedrooms to help pay the mortgage, many lenders will take this into account and will include 75% of the rental you receive as part of your qualifying income.
For most of us, our eyes glaze over when we are told we need to compile a budget, but it’s a mandatory chore I’m afraid if you want to ensure you can service a mortgage without having to sell off your firstborn. To find out what you can afford, compile a list of all your outgoings, income and debt repayments. Convert everything to a monthly basis, and find out how much money you have left over at the end of each month. Then go to any home loan calculators on the websites of the major banks to find out what level of mortgage that money will service. The banks’ websites will also often provide you with budgeting planners and downloadable checklists.
If you find using the calculators daunting, don’t hesitate to visit your bank and get them to walk you through the whole process. They will be pleased to help and you do not have to make any sort of commitment at this stage.
This is an extract from The Streetwise Home Buyer - the step-by-step guide to smart home buying in New Zealand.