Options When First Home Loans Doesn’t Work

As mortgage advisers, it’s important to have options for first home buyers.

Many banks require a 20% deposit for pre-approvals, which doesn’t always work for first home buyers; however, Kainga Ora offers a first home loans scheme that allows banks to offer pre-approvals outside of the current Reserve Bank LVR rules.

About First Home Loans

The option of Kainga Ora’s First Home Loan can make it easier for you to get into your first home as they can support your purchase with as little 5% deposit, and that can include your KiwiSaver withdrawal and the First Home Grant (if eligible) too.

But if you want to use the First Home Loans supported by Kainga Ora there is eligibility criteria that you must meet, and you also have to fit one of the banks own criteria.

The key criteria is:

• You must be a New Zealand citizen, permanent resident, or a resident visa holder who is “ordinarily resident in New Zealand”
• You must be a first home buyer, or a previous home owner in a similar financial position to a first home buyer
• Your before tax income from the last 12 months cannot have exceeded:
  • $95,000 or less for an individual buyer without dependents; or
  • $150,000 or less for an individual buyer with one or more dependents; or
  • $150,000 or less (combined) for two or more buyers, regardless of the number of dependents

If you exceed these caps, you can’t apply.

In addition, you must:

• Have a minimum deposit that is at least 5% of the purchase price of the home you are interested in buying (inclusive of all savings, grants, first-home withdrawals, and gifts)
• Have been in your job for a minimum of 12-months, or the same occupation for at least 24-months.
• Be purchasing a home for you to live in as your primary place of residence
• Not own any other property or land, this does not include ownership of Māori land
• Be purchasing a property of less than 1 hectare
• Pay a 0.5% Lender’s Mortgage Insurance premium and loan application fee
  (if applied by the lender)

Depending on the bank, you can use the First Home Loans for either existing homes, brand new homes or homes that are being built. There are four main participating banks: Kiwibank, SBS Bank, The Co-Operative Bank and Westpac.

Mortgage Managers use all of these banks and also Unity which is a non-bank but has very competitive interest rates. Many mortgage advisers do not use Unity; however they are a great alternative to the participating banks and often are selected in preference to them.

When First Home Loans Doesn’t Work

While the First Home Loans is a popular option, not every first home buyer will fit the criteria.

The two areas that cause the most concern, are:

1. Incomes – being over the income cap for the past 12-months
2. Employment – have changed employers or occupations, and typically in an effort to get a better and higher paying role

In many cases you would argue that these should not stop you from getting a home, but they mean that you do not meet the criteria set by Kainga Ora and in many cases people believe that this excludes them from home ownership.

The good news is there are some other options.

Mortgage Managers Have Options

The key rule that stops most banks from lending to first home buyers with less than 20% deposit is what we call the LVR rules which are set by the countries central bank; The Reserve Bank or New Zealand.

These rules restrict what lending the banks are able to offer with less than 20% deposit.

There are exclusions and for first home buyers the key ones include:

1. First Home Loans (by Kainga Ora) – as mentioned the participating banks can lend with as little as 5% deposits to eligible buyers.
2. New Builds – these are exempt and therefore banks are able to lend to buyers with less than 20% deposit. Most banks still see this lending as having a higher risk and therefore many still require a 10-15% deposit but we do have one bank that will provide first home buyers new build finance with as little as 5% deposit.
3. Non-Banks – as mentioned, the Reserve Bank rules apply to banks and they must adhere to those rules BUT the non bank lenders can design their own rules and that has seen a few offering first home buyers finance with as little as 10% deposit.

Non-banks may have different criteria, but they can be a good option.

We have two non-banks that we regularly use for 90% loans and one of them competes directly with banks offering competitive interest rates and a cashback. The other option is slightly more expensive without the cashback, but the criteria is a little more relaxed and so can still help you buy a home.

Client Scenario: to illustrate what is possible, we will share a recent non-bank mortgage we did.

We had a client who earned $140,000, so exceeded the income cap for a single person ($95,000) which we thought was good as she could then afford a home loan.

She had come to us frustrated as she had been to her bank (as many people do) and her bank said they couldn’t approve her with less than a 20% deposit and she only had 10% plus she had a student loan which they did not like as it reduced her available income. She then tried a mortgage adviser couldn’t help her either.

Then someone suggested she try Mortgage Managers.

We assessed the situation and could see why the bank and other adviser had not been able to assist. It was obvious with a 10% deposit that there were limited options, that her income was good but limited the options further, and then her student loan repayments are linked to income and so her payments were high and reduced her borrowing power.

So we tested a 2-step process:

1. Firstly, we were able to refinance her student loan as a separate personal loan, which reduced her repayments. It meant that she went from have an interest free loan to paying some interest, but the actual interest was not too much and of course it allowed her to buy a home which was the ultimate goal.
2. Then we found a non-bank lender that worked for her, and she was able to purchase a property with a 10% deposit. The interest rate was 7.99%, but after 6 months, she could revisit the lender and get a lower rate.

The result … a very happy lady now in her new home.

Experienced Mortgage Advisers Can Help

Our message to first home buyers is that the Kainga Ora scheme is one option, but there are other options available through mortgage advisers like us. At Mortgage Managers we have the experience to assess things fully, choices of lenders that we can offer and that means we can find the best options for you.

If you are serious about buyer a new home then we would love to work with you – contact us and let’s get started.