How much can I borrow?
The banks look at two main factors in determining how much you can borrow.
Loan to value ratio (LVR) – this refers to how much of the property price you are borrowing, in other words how much deposit you have. If your LVR is 90%, you have 10% deposit. As a general rule, first home buyers can buy a house as high as 90-95% LVR (5-10% deposit) depending on bank restrictions at the time of application.
Servicing ability – Often referred to Net Service Ratio (NSR) or Uncommitted Monthly Income (UMI). This measures your ability to service your debt based on your income. Factors such as how many dependents you have, short term debt and student loans will impact your servicing ability. If your income is tight, it’s recommended to get rid of short term debt before applying for a home loan.
To find out how much you can borrow, you’ll need to speak with your local home loan advisor. See how to prepare for bank approval.
What you can borrow is different to what you can afford. It’s important to know how your new mortgage will impact your lifestyle so you can still enjoy life and do what you want to be able to do. Jiji helps her FHBs come up with a plan to ensure their mortgage is paid as fast as possible while still being able to live a lifestyle they’re happy with, giving them peace of mind before embarking on what will be the biggest financial decision of their life.
How much deposit do I need?
Banks prefer if you have 20% deposit, this means less risk for them and getting an approval is easier. With 20% deposit, you will also be eligible for better rates and cash contributions. See how to build a deposit.
However, if saving 20% of the average house price in Auckland seems impossible, you can buy your first home with as little as 5% deposit. The Reserve Bank (RBNZ) has imposed restrictions on banks where only a certain percentage of their overall lending can be over 80% LVR (loan to value ratio). This system works like a flood gate, when the bank has lending capacity over 80% LVR, the flood gates open, once they reach their limit the gates shut and will no longer provide approvals to anyone with less than 20% deposit. That’s why different banks will have different lending capacities at any one time so often it’s a case of having to wait a little bit before you’re able to gain approval.
The downfalls of having less than 20% deposit are:
- LMI (lenders mortgage insurance) or a LEF (low equity fee) will be applied. The amount of LMI or LEF you will be charged will vary depending on your LVR and how much you borrow and also from bank to bank. This cost is passed on by the bank to cover their cost of re-insuring your loan to protect themselves from the higher risk lending.
- You may be required to obtain a registered valuation where the valuation needs to come in equal to or higher than the purchase price. At around $600 per valuation, this can make bidding at auction an expensive exercise.
- You won’t be eligible for the same level of rate discounts and cash contributions.
- There is less tolerance for adverse behaviours such as high short term debt levels or large numbers of unarranged overdraft fees. At less than 20% deposit, your account conduct and debt appetite plays a much larger role. See how to prepare for bank approval.
- Banks will generally require 5% of the purchase price to be genuine savings, i.e. not a gift but money you have genuinely saved yourself. This is to demonstrate that you are capable of saving money and display signs of good savings behaviour.
How can I prepare for a bank approval
Account conduct: This refers to how well you manage your bank accounts. Is your day to day transactional account squeaky clean or is there evidence of unarranged overdraft fees and insufficient funds. To put it simply, are you spending more than you earn?
Tip: Consolidate your bank accounts into 1 (max 2) transactional accounts where your income and expenses flow in and out of plus 1 savings account where you are putting regular savings. When it comes to bank approval, you will need to provide 3 – 6 months of statements for these accounts so it’ll be much easier for both sides when this time comes.- Savings ability: Banks will generally require 5% of the purchase price to be genuine savings, i.e. not a gift but money you have genuinely saved yourself. This is to demonstrate that you are capable of saving money and display signs of good savings behaviour.
- Can you cover the shortfall between your rent and new proposed mortgage? Banks need you to prove that once you get the new mortgage, you will be able to afford the new repayments. They do this by looking at the difference between what you are currently paying in rent and what your proposed mortgage repayments will be at around about a 7.5% interest rate to account for interest rate rises in the future. You want to get into a good habit of saving this amount for at least 3 months to demonstrate you will be able to afford your new mortgage.
How long is my approval valid for?
Depending on the bank, approvals are generally valid for 60 – 90 days and renewable for the same period again. Once this expires, you will need to resubmit your application and supply some updated paperwork.
What’s the loan term?
The loan term is how many years it will take to repay your mortgage should you only make minimum repayments over the term. The maximum loan term in NZ is 30 years or up to the age of 70 – 75. The longer the loan term, the lower your repayments, however you can opt to increase your repayments which will reduce your loan term, while giving you the flexibility to reduce them back to the minimum when you need i.e. you move down to one income.
Jiji recommends increasing your repayments when you are in the position to, this is often before you have kids; when your expenses are relatively low and you can make large dents in your mortgage.
Over a 30 year term, you will be paying more back to the bank in interest than the loan itself.
Jiji’s customers are generally paying their mortgage off 9 years earlier through simply structuring their loan correctly. Enquire with Jiji today on how to pay off your mortgage faster.