With house deposits taking around 10 years to save for the average kiwi, it is no wonder there have been a growing number of new products and schemes allowing people to buy with less than a 20% deposit.
Low equity home ownership options
You have options like You own or Kiwibank’s Co own, where you can share ownership with someone. In the linked You Own blog article, there are many scenarios where you are actually better off waiting to buy on your own, rather than sharing ownership. For co ownership like Kiwibank’s offering there are pros and cons that should be considered. With shared ownership with friends and family I do worry about messy exits. Homeowners look to sell on average every 6-7 years, so if you have a group of homeowners together there is a good chance one of the homeowners will want out even sooner than that. There needs to be very clear documents drawn up and a clear understanding amongst all parties. Even then, it can still get messy.
What is the Squirrel launchpad home loan?
Of all the non publically funded products out there I most prefer the Squirrel Launchpad home loan. To be eligible you need to be a first home buyer, have at least a 5% deposit, intending to live in the property, buying in a metro location, and have been on PAYE income or a fixed term contract for at least a year (self employed are out of luck).
Squirrel will provide up to 15% of the deposit to a maximum of $120,000. That means any house that costs more than $800,000 will have a slightly smaller allocation than 15% from Squirrel due to the $120,000 cap.
To get up to a 20% deposit you will need fund the difference. You can include KiwiSaver savings too. On an $800,000 house for example, a 20% deposit would be $160,000. Squirrel would pay $120,000 and you would need a minimum of $40,000. This would mean a $760,000 loan ($120,000 + $640,000). A $700,000 house, Squirrel would pay $105,000 and you would pay a minimum of $35,000. Total loan $665,000. Final example, a price of $900,000 (above the price cap for a 5% deposit) would mean $120,000 from Squirrel and a minimum of $60,000 (that is around a 6.7% deposit) from you.
You can buy with as little as a 5% deposit and you remain the sole owner of the property. The downside is the interest rates. Currently the rates are between 8.5% and 9.95% but can change.
The loan is split into two.
80% of the house value will be a 30 year base loan. This is a floating loan so the rate can change and is interest only for the first five years of the loan before going on principal and interest thereafter. The current interest rate is 8.5%.
The remaining 15% or $120,000 (whichever is higher) of the house value will be on the equity loan. This is a fixed five year loan, where you are required to pay principal and interest. This loan balance will be $0 at the end of five years.
The thinking behind the loan structure is so you can pay off the higher interest loan more quickly.
There is also a $950 establishment fee.
Should I use the Squirrel Launchpad home loan now, or wait to buy with a higher deposit?
With these interest rates, you do need to be on a good income. The repayments alone on a $700,000 property with a 5% deposit are over $74,000 a year for the first five years. More on higher priced properties.
Staying on the Launchpad loan for 30 years can be a bad move for your money in many instances. Even at house price growth of 10% per year, you would still be better off saving for a 20% deposit in many instances. A lot depends on how soon you can buy a property with a 20% deposit.
But in several cases, buying with Launchpad and switching to a mainstream bank when you reach the 20% loan to equity level required by most banks, will actually see you better off than waiting to buy on your own, even with the higher interest rates. Again, a lot depends on how much you are paying to rent in the meantime and when you expect to buy.
Thankfully, I have made a calculator just for the Launchpad home loan product. You just need to enter a few details in the purple cells with green font and you will see a bunch of details including:
Your annual loan payments
Your level of housing equity
Your net worth gains
How much you are better (or worse off) with the decision to go with the product.
You can even see the year at which you go from being better off to worse off, or vice versa, so you know when may be a good time to switch to a mainstream bank. Just note that if you intend to leave Squirrel within five years, you are likely to be subject to be liable for break fees on the Squirrel equity loan.
It’s a comprehensive comparison calculator between buying with Squirrel and waiting to buy on your own.
Summary
One final note is that some banks do offer lending on as little as a 10% deposit. Especially for higher income earners, which many people looking to get the Squirrel loans will be. The banks low equity interest rates are much lower than the current Squirrel rates, so that is something worth considering too. If you are eligible for the Squirrel loan, you are likely eligible for a banks low equity loan too, as long as they are under their quota. Banks don’t want too many low equity loans on their books.
Kainga Ora’s first home loan scheme is also available for those with as little as a 5% deposit, but there are income caps on this scheme.
Generally, if you must buy a home with less than a 20% deposit, the ideal would be the Kainga Ora home loan if you meet the income cap restrictions. If you earn more than the Kainga Ora restrictions and have less than a 10% deposit (but at least 5%), the ideal would most likely be Squirrel’s Launchpad loan. If you earn more than the Kainga Ora income restrictions and have between a 10% and 20% deposit the ideal would be a mainstream bank low equity loan. Only if the bank doesn’t provide you funding for a low equity loan then Squirrel as a back up.
If you do go with the Kainga Ora or Launchpad loans, then it will generally be recommended to go to a mainstream bank as soon as you meet the banks eligibility criteria. Otherwise, staying on the original low equity loans will cost you big time.
Kainga Ora and Squirrel are doing great things in helping first home buyers with smaller deposits get into the property market. Don’t get me wrong. But as I am sure they admit themselves, they are a springboard and not a long term solution.
Personally, I think they are better options than the likes of You Own and Co Own (shared ownership). The costs and risks are much greater with these options.
If you need help with any financial decisions , then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here