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Lower interest rates – purchases with less than 20% deposit have whats called a “low equity margin / premium” added onto the interest rate which can be anywhere up to 1%.

Cash back – The bank provides a cash contribution upon settlement to you. This is significantly reduced with a deposit of less than 20%.

Assessment criteria – The banks are much harsher and critical when deposit is less than 20%.  For example:

• Border/flatmate income for some banks are not used or reduced
• For self employed income, you generally cannot use forecasted income and banks want a minimum of 2 years financials
• Account conduct such as dishonours and late payments are highly critiqued
• Bonus or commission income carries less weighting and can be scaled more heavily

With 20% deposit or more, these things can be often mitigated and accepted.

Choice of lenders – Many lenders are only offering less than 20% deposit loans to existing customers.

Here is a list of costs associated with the home buying process:

• Valuation – if deposit is less than 20%, a valuation is always required. This costs on average $1,000 and ranges from $750-$1,500 generally, but is case by case.
• Building inspection – majority of time this is optional and not a requirement of the bank. This is usually $500-$1,000 and mainly done for the customers own satisfaction.  Price depends on complexity.
• Legal fees – It is recommended to engage with a lawyer as soon as you find a house you are interested in to review the draft Sale and purchase agreement. They can help protect you and save a lot of money in the long run
• New ongoing expenses include house insurance, council rates and home maintenance costs
• One-off costs – moving costs. Remember to change over all your services such as broadband, electricity, furniture removal, transport and lastly, redirect all your mail

This is an important step which Ascend can help you ascertain quickly. Each bank has a different calculator and accounts for various expenses and income differently which can lead to sometimes eye-watering differences between what each bank will lend to you.

A lender will account for all of your income sources and all of your debts whether it be personal, business or trust income.

Types of income:

• Salary / wage – taken at 100% almost always
• Bonus / commissions / overtime – this is scaled down differently per lender
• Rental income – this is scaled down differently per lender
• Border / flatmate income
• Self employed / contract income – This can be scaled, annualised or forecasted
• Dividends / Investment income – this is scaled down differently per lender
• Superannuation / IRD various benefits / WINZ Benefit

Expenses

Lenders will need to account for all of your fixed expenses

• Any loan repayments
• Credit cards / overdrafts / buy now, pay later facilities – These take a heavy toll on servicing. Lenders account for these as though they are fully drawn and account using 5% of the limit for a monthly repayment. E.g. if you have a credit card limit of $10k. $500 per month needs to be input as an expense. This is why it is important to keep unsecured short term debt to a minimum
• Fixed living costs need to be verified e.g. private schooling, insurances, child support, Kiwisaver contributions
• Discretionary expenditure – regulation has tightened up on this and expenses such as entertainment, dining out, bars/clubs, gyms etc. are now looked at in very fine detail
• Essential living costs – This is things like vehicle expenses, food, clothing, medical expenses and utility costs
• Existing mortgage lending – This is all assessed using a test rate which is much higher than the rate you are likely going to pay. The banks do this to protect you from any future rate rises or drops in income so quite often if the bank says no, but you think can afford it, this will be the disparity. Test rates are often 2-3% higher than the variable rate at the current time.