How to Raise a Bigger Deposit - and Why It's a Good Idea
Mon June 10th 2019
When you’re staring down the barrel of a ‘modest’ home for $700k and beyond, it can be easy to get discouraged. How can you possibly save more than $140k, especially when it seems that house prices go up faster than you can save. So how do you go about raising a larger deposit?
When you're staring down the barrel of a 'modest' home for $700k and beyond, it can be easy to get discouraged. How can you possibly save more than $140k, especially when it seems that house prices go up faster than you can save.
So let's start with some good news – the Reserve Bank has loosened its loan-to-value limit. Now, banks are allowed to give out mortgages to more people with less than a 20% deposit. It used to be 10% of new business, and now its 15%. That means those with smaller deposits, or looking at more expensive homes will have a better shot at getting the financing they need. But remember, just because you can get the larger mortgage, doesn't mean you should.
It's much smarter, in the long term, to gather the biggest deposit you can, and reduce your borrowing as much as possible. With a deposit of 20% or more, you're likely to get a better deal on interest rates, and will ultimately pay less interest. With the power of compounding interest at play, that can pay of hugely. On a 30-year mortgage, you could end up paying about double for your mortgage. So, every dollar you can take off your mortgage will give you, hypothetically a 100% return on investment.
So how do you go about raising a larger deposit, when it's unlikely you'll be able to save enough?
Leverage your relationship, sell depreciating assets
If you're in a relationship – double income, no kids – now's the time to decide you are going to buy property together. That means living on one income and saving the other, and you'll be amazed at how quickly your savings mount.
Once you've made the decision, try selling everything you don't need, starting with your second car. Whatever machinery, appliances, furniture or other possessions you could do without, whatever is taking up room and not being used often – list them on Trade Me, flog them off and realise the capital.
Don't forget your KiwiSaver account
Put more of your income into KiwiSaver – see if you can manage 12% and get used to living on less. You won't be able to touch it – unless you buy a house. It's like paying a mortgage ahead of time – you get used to the money going out.
If you've been a KiwiSaver contributor for three years or more, you might be able to get a HomeStart grant. You have to be a first-home buyer, and the amount of the grant is set according to how many years you've been a saver, and depends on whether you are building ($20,000 maximum) or purchasing an existing home ($10,000 maximum).
And the cash you get out of selling your depreciating assets? Stick it in KiwiSaver too. You'll get a better return than just putting it in the bank.
Budget every inch of your life
There's nothing like doing the budget hard yards. Not only does it show you where your money is really going, you also find out where the fat can be trimmed. It's amazing how much loose change dribbles away on cappuccinos, beer and Friday night take aways.
Once your budget is done, set yourself some frugality goals. Use more public transport and save on parking. Buy clothes from op-shops, look out for supermarket specials, always cook meals at home and eat your leftovers. Buy non-perishable items in bulk if you've got the storage space. Turn down the heat and wear more wool. Walk or cycle to work.
Work harder, earn more
Ask your boss for a pay rise. Offer to do overtime, or alternatively get a part-time job. If you don't have kids or other commitments this is very possible, and the extra pay can go right into your savings.
An extra benefit of working more hours is, you won't have time to spend money on entertainment when you're bored.
Clear your expensive debts
Every debt except your student loan carries interest, and your credit card will be the most expensive. Get rid of these as soon as you can, or if your credit card debt is really high, look at gathering all your debts into one personal loan that may only be 10%.
Better still, ask a generous, well-off family member to take on your loan with their revolving credit that's probably only 5-6%. You'll clear it a lot faster that way.
Check out alternative lending
Maximise the return on your nest egg (the one you haven't put in KiwiSaver). Consider peer-to-peer lending, which realises excellent interest rates. But do your homework – a higher return carries higher risk, and some groups offer more surety than others.
The pros and cons of guarantees
You've been working hard and saving hard to get a deposit together, but you still need a bit more – and you've found the perfect house. You could ask your friendly property-owning relatives for a personal guarantee.
All they have to do is provide the bank with a mortgage over their property, and an assurance that they will cover the loan if you can't. It's simple, with minimum paperwork needed, and your relative doesn't have to come up with any cash.
The downside is, a guarantee is simple to set up, but very complex to unwind even if you have equity, and your relatives can't do much more borrowing now they effectively have two mortgages. You also have to use the same bank as your relatives, which may not offer the best deal. And if you fall behind on payments, the bank could decide to sell both properties.
Not surprising this option is out of favour with financial advisors and lawyers.
Your deposit as a loan – or a gift
Your relatives can lend you the deposit, and if they don't have to borrow it themselves this is much the simplest way of getting into a property. You can have a private arrangement with them to pay back the money either in regular payments or in a lump sum once you can afford to refinance.
Using revolving credit is one way to go if your relatives need to borrow, and their risk is only the amount you borrow and not their property – or yours. It's the most popular way for parents to help their children into their first home.
Then there's a gift, if you're very lucky and have generous affluent relatives who really love you and are prepared to front up with the cash money.
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