A Guide on how much can you borrow for your home loan
Before you look around for your dream home, we recommend you first find out how much you can borrow to buy a home. Lendal Mortgages who are mortgage advisors in Wellington understands that every individual’s financial situation is unique, and they are dedicated to helping you find the right loan amount for your needs.
Types of Home Loans Available in NZ
Many first-time home buyers don’t realise they have more than one option when it comes to home loans structures. In this section, we’ve provided three types of home loans that are offered to first time home buyers.
Fixed-Rate vs. Variable-Rate on Home Loans
When it comes to home loans there will always be rates as they are the costs involved to finance the loan. There are two types of rates that lenders offer:
Fixed-rate: Has the same interest rate throughout the chosen fixed rate period and won’t fluctuate. It allows you to have standardised weekly/fortnightly/monthly payments. You’ll also know what your repayments are without unpredictability. Depending on what bank you are with you could potentially increase your repayments on each repayment frequency or make bulk repayments.
Variable-rate: The rate will change over time depending on the market. Variable-rate mortgages tend to have higher ates compared to fixed-rate mortgages however they allow you to repay the loan quicker by bulk repayment with no penalty.
Not sure which type of rate to choose? Lendal Mortages are home loan advisors who will look at all aspects of your finances and provide you with advice on the best type of loan to choose based on their experience. Our professional mortgage advisors will break down the advantages and potential risks of both options so you can make an informed decision on which type of rate works best for your budget.
Interest-Only Mortgage Loans
An interest-only loan is a type of mortgage that allows you to only pay the interest for an agreed period. Essentially, paying the interest on your mortgage for the first several years can lower your initial repayments- however once you convert to principal and interest the repayments can increase as the remaining term will be based on the approved loan term being reduced. Interest only loans are more common on investment properties than owner occupied homes.
First Home Buyer Loans
A first-home buyer loan is structured to make the loan process more affordable for first-time buyers. For other types of mortgages, borrowers may require up to 20% of the value of the property before they will consider your application. However, with a first home buyer loan you only need a deposit of 5% with participating banks.
This type of home loan is issued by specific banks and lenders. If this is the option you’d like to choose as a first-time home buyer, Lendal Mortgages will connect you with the right lenders that offer this type of loan.
Loan-to-Value Ratio (LVR) - What Does it Mean
The loan-to-value ratio is a key factor lenders use to assess risk and decide the terms of your home loan. In this section, we explain what LVR is, how it can affect the amount you can borrow, and what the restrictions are in New Zealand.
Explanation of LVR and Its Home Loan Importance
Lenders use LVR to figure out the ratio associated with the value of your property compared to the size of your property as a percentage. The bank or lender will utilise LVR to fully assess the risk of a loan. Each lender will have their own way of evaluating risk to determine which LVR is suitable for different home loan types.
How LVR Impacts the Mortgage Amount You Can Borrow
A higher LVR means that you’re more of a risk to the lender. For example, if you have an LVR at 80% or lower you may be able to borrow more with lower rates and repayments.
On the other hand, if your LVR is higher than 80% you may need to ask someone you trust such as a family member to function as a guarantor to balance the risk. Or you’ll need to pay lenders mortgage insurance to protect you from financial loss.
Current LVR Restrictions in New Zealand
LVR restrictions in New Zealand are said to change by July 2024. The Reserve Bank is planning to bring in brand new mortgage rules such as the Debt-to-Income Ratios. This change will then adjust the rules for LVR. Under these new regulations, borrowers will need a 30% deposit for an existing property as opposed to the current 35%.
The table below shows the current LVR restrictions. In the top line you’ll see that if you’re an owner occupier, the bank is only permitted to lend you up to 80%. The remaining 20% is the deposit you must provide.
Property Type | Percentage of the Deposit Required | Percentage Lending from the Bank | |
Owner Occupier | Existing Property | 10% | 90% |
New Building | 10% | 90% | |
Investor | Existing Property | 35% | 65% |
New Building | 20% | 80% |
Income and Employment Stability for Mortgage Loan
Banks won’t provide you with a home loan if you’re unemployed. Here we discuss why it’s important to have a stable income when applying for a home loan. We’ve also provided information for those who are self-employed.
Importance of Stable Employment for Loans
Having a long-term job and a stable income shows lenders that you are responsible and less of a liability when you apply for a home loan. Additionally, the reliability of your income will play a vital role in getting approved.
A lender will determine the source of your income and measure your ability to maintain it long-term. Your lender will also consider other sources of income such as alimony, disability, and retirement funds.
Self-Employment Considerations
It may be challenging to get approved for a home loan if you’re self-employed but it’s not impossible if you have the right information. Lenders may check the average of your income over two years to calculate your buying power when you are self-employed.
Proof of Income Requirements
For those who earn a consistent income, you’ll need to provide three months’ bank statements or three consecutive payslips to apply for a home loan. On the other hand, if you are self-employed, you’ll need to provide at least two years of tax returns or a recent IR3 summary.
Savings and Deposit Requirements for a Home Loan
Lenders will have specific savings and deposit requirements for the type of property you want to purchase. Here’s what you need to know before applying for a home loan.
Minimum Deposit Requirements
In New Zealand, lenders mostly lend on a deposit of 20%. However, in same cases the minimum deposit amount is 10%.
On the other hand, if you’re eligible for a first home loan, you’ll only need a deposit of 5% as opposed to 20%.
Role of KiwiSaver in Saving for a Mortgage Deposit
KiwiSaver is a savings scheme for New Zealand locals. It helps people save money for deposits required for a home loan. You must use KiwiSaver for up to three years or pay 3% of your income every month to save for your deposit. If you qualify, you can withdraw most of your savings from your KiwiSaver to purchase your first home.
Mortgage Rates and Fees
Interest rates and fees may vary depending on the bank you’re using and the type of home loan you choose. In this section, we explain how interest rates can affect how much you can borrow for a home loan.
How Interest Rates Affect Borrowing Capacity
The rise in interest rates can affect your mortgage and can lead to an overall increase in repayments. With lower interest rates, you can borrow more because the repayments on the loan are lower. However, higher interest rates can reduce your borrowing power because the loan becomes more expensive.
Typical Fees Associated with Home Loans
When purchasing a house in New Zealand there may be various fees you are required to pay such as:
Legal fees for documentation to buy the property.
Buyer’s agent fees.
Risk fee like an LMI.
Home insurance to cover loss or damage.
Utilities and connections.
Loan establishment fee.
Valuation fee.
Administration fee from the lender.
If you want a breakdown of all the fees associated with your home loan, Lendal Mortgage advisors will assist you through the entire process, so you don’t have any unexpected expenses.
Home Loan Pre-Approval Process
A pre-approval process requires first-time home buyers to go through a pre qualification process. There are several benefits and steps you need to be aware of before applying for pre-approval. Here’s what you need to know.
Benefits of Getting Pre-Approved
During the pre-approval process, you’ll know exactly how much you can borrow and what you can afford to pay. It helps you budget accordingly for your deposit, monthly repayments, and extra fees involved when purchasing a home. The lender will calculate what you qualify for based on your gross income.
Another benefit of going through a pre-approval process is that it can speed up the closing process once you’ve found your dream home. Pre-approval makes you a more informed buyer so you can make better choices when taking out a home loan.
Steps Involved in Obtaining Home Loan Pre-Approval
For the pre-approval process you’ll need the following:
Three recent consecutive payslips
A letter from your employer
ID or evidence of your New Zealand citizenship
Three months’ bank statements
Three months’ credit card statements
Lendal Mortgage will then assist you with the various forms you need, your KiwiSaver account, and getting pre-approved for your home loan.
Get Pre-Approved with Lendal Mortgages
Want to save time and money looking for the best lenders in Wellington? Lendal Mortgages has over 20 years of experience in the market and will connect you with lenders that will offer you the best rates based on your criteria. We take your loan application to several banks to speed up the approval process.
Contact Lendal Mortgages Advisors we can find you the best loan that’s perfect for you. With the help of our professional advisors, you’ll be one step closer to buying your dream home.
Disclaimer:
The above is general information and should not be taken as an approval for any sort of lending. For a full financial review please contact Lendal Mortgages. All lending needs to be approved by a participating bank with supporting documentation to be obtained if clients lending requests are approved.