It’s not easy buying your first home with a small deposit and in many cases it can seem that home ownership is an impossible dream.
You can speak with most banks and they just say “NO” that you need a bigger deposit, or some banks and mortgage advisers might suggest the First Home Loans scheme that is available with some banks and backed by the Government through Kainga Ora.
The First Home Loans Scheme Can Work
They say that with a First Home Loan you only need a 5% deposit which means that getting into your first home should be much easier, but first you need to qualify.
First Home Loans are issued by selected banks and other lenders, and underwritten by Kāinga Ora which allows the lender to provide loans that would otherwise sit outside their lending standards. Unfortunately most of the major banks have decided not to offer this, so there are limited banks that even know what is required to get these loans approved.
Another Option Is Co-Ownership
Have you heard of co-ownership with property?
Very few people in New Zealand know much about co-ownership and how it works, but it has been a popular option in other parts of the world for many years. It’s an option used in Britain with many recent arrivals knowing how it works and quite a few used it to get into their first home there.
It’s a way to get into your first home when you do not have a large deposit.
Traditionally you may have entered into a co-ownership agreement with a family member (typically a parent) where the other party may have the equity to enable you to buy a property, and their reward is to share in the gain of the value.
As mortgage advisers we have been helping people get into their first home using this option but instead of a family member supplying the help it can now be sourced from companies that offer this as a financial product … a formal co ownership agreement.
There are very few mortgage advisers that have access to the co-ownership option
The key criteria to be aware of are;
- You must have a minimum of 5% deposit – this can include your KiwiSaver withdrawal, any First Home Grant and of course any savings that you have. You can have some gifted deposit too, but they really want to see that you have been able to save your deposit yourself.
- You need to be able to afford the repayments – your adviser can help with working this out. The funding is done with a non-bank lender and therefore the criteria is not as tough as the banks, but there is still a responsibility to ensure that you can afford the repayments. Of course this will be important to you as well.
You can have some blemishes on your credit check and other debts too, but these are assessed on a case by case basis. The adviser will be able to help present this to the lender and we have had good success with some poor credit, poor account conduct and people with quite a lot of short-term debt.
So How Do The Numbers Work For Co-Ownership?
This is a scenario that we sent to someone recently who only had a 5% ($30,000) deposit.
So you have a deposit of $30,000 and therefore with borrowing of 95% you could purchase for $600,000
Unfortunately at the moment the banks and even non-banks are not lending to 95% but we have an option with one lender and shared ownership.
This is how the finances work;
| Purchase Price | $600,000 | |
| Less Your Deposit; | ||
| Cash Savings | $30,000 | $30,000 |
| Therefore Required: | $570,000 | |
| Funded by; | ||
| First Mortgage Finance 1st | 80% | $480,000 |
| Co-Ownership by YouOwn | 16.7% | $100,295 |
| Less Fees | $10,295 | |
| $570,000 |
This is funded using a 1st mortgage provided by a non-bank mortgage provider and a co-ownership by YouOwn.
The interest rate for the non-bank mortgage providers range from about 3.39% to 6.75% and YouOwn have an equity charge of 4.95%
That means the repayments will be approx. $595 to $815 per week depending on your situation. This is made up of the non-bank mortgage provider at approx. $500 to $720 weekly and YouOwn at $95 weekly.
We currently have three options for the 1st mortgage and they range in
How Does This Compare To Bank Funding?
Comparing to bank if they could approve the loan;
ASB currently have a 2-year rate of 2.69% (as at 16th October 2020) plus add a low equity margin of 1.30% so if you chose this fixed term you would be paying 3.99% so the repayments for a 95% loan ($570,000) would be approx. $630 per week.
ASB typically charge a loan processing fee of $150 plus require a valuation costing $700-900 +/- depending on location etc.
Co-ownership Often Is More Expensive … BUT
As you can see the illustration of the co-ownership concept that we have provided may be more expensive, but it is a solution.
We expect that it is cheaper than waiting and saving, especially with house prices increasing as they are.
Getting 100% Ownership
Also you need to be aware that with co-ownership you will want to buy the remaining share from YouOwn in the future.
This is generally done after 5-years, and they make their money from the expected increase in value and this can be explained in more detail that will be suitable to your situation.
In this scenario they have a 16.7% share of the property worth $600,000 so YouOwn’s share = $100,295
If the value of the property is worth ‘say’ $800,000 in 5-years then the YouOwn share is now worth $133,600 (16.7%) so an increase of $33,305
Of course your share (83.3%) has increased by $166,600 too!
Co-Ownership Provides Another Option
If you can get a mortgage with a bank or a non bank lender then that is most likely going to be your best option; however in many cases this is not possible.
There are four main reasons for this;
- Low Deposit – if you have not been able to save a big enough deposit then the banks and non-bank lender might not be prepared to give you a mortgage.
- Hard to Prove Income – the banks criteria for proving income can be tough especially for self-employed people. Some non banks are better but they tend to require a larger deposit which you may not have.
- Too much short-term debts – the banks do not like to see too much short term debt when they are assessing an application. You may have great repayment history and be quite okay with affording the payments, but the banks have rules on how much debt you can have and they also need to factor on those repayments plus the new mortgage repayments. We can sometimes consolidate some debts into the mortgage when we do co-ownership arrangements, depending on the deposit that you have available from your KiwiSaver, any First Home Grant and of course your savings too.
- Some Credit Issues – sometimes past credit issues will mean that the banks cannot approve your mortgage. Again, some non bank lenders are not quite so strict, but they will still need your application presented to them well.
Banks are not looking to provide finance for everyone, and if you don’t fit the standard criteria then they may very likely say “no” to you.
You may be quite comfortable with the repayments and they may even be comparable to the rent that you are paying too. Owning a house is not always more expensive than renting, but many people may struggle to meet the banks criteria.
Around the world these types of arrangements have been quite popular. In the UK they have had shared ownership schemes for some time now. These are Government backed schemes and they have helped a lot of first home buyers there. READ HERE.
They are not a new concept at all.
Speak To An Adviser To See If This Could Work For You
As mortgage advisers we know that this is not the best option for all people, but it is a viable option that can help people get into a home where otherwise they may need to save for another year or two.
Waiting and watching the house values increasing can be very frustrating too with house values increasing at a faster rate than you could save!
That’s when you really do see the value in buying a home with a co-ownership arrangement.
It may allow you to buy into the market now at the current house prices. Using the example about you are taking most of the ownership, but getting help with 16.7%.
You can live in the house and treat it as your own.
By agreement you are able to buy that 16.7% share at a later date when you are in a better financial position, and of course when the value has increased your equity in the house which allows you to get a good bank mortgage at lower interest rates.
You have missed out on the increased value on the 16.7% share, but you have got the gains from the 83.3%.
The best thing to do is to contact an adviser that can look at this for you.
Only Some Mortgage Advisers Have This Option
Very few advisers have the knowledge and access to this co ownership option, but the team at Mortgage Managers can help.
This is not your standard home loan and therefore it does require the adviser to have a good understanding of how co-ownership works, and for this reason the access has been limited to a select group of advisers.
Mortgage Managers are your co-ownership specialists and help throughout the country.
They have helped many people already and can help you with buying your first home too.
