How much will a bank lend on a property?
Generally, we can expect a lender to lend up to 80% of the value or price of a house (generally whichever is lower).
Often, lower percentages are loaned on properties outside urban areas and on apartments. These figures are sometimes called the ‘loan to value’ ratio, or ‘LVR’.
It is possible to borrow up to 95% of a property’s value in some cases. But that’s a big risk for both the borrower and the lender.
You may face two extra costs when borrowing a high proportion of a property’s value:
- Most lenders will charge either a low-equity premium or mortgage indemnity insurance (this is insurance that acts as a form of additional security for your lender) if you borrow over 80%. This helps to protect them from the risk that you might not keep up repayments – it does not protect you from the obligation to repay. The premium is a lump sum that you can pay in cash or add to the amount you borrow. Some banks add a margin to the interest rate to reflect the risk. This can vary, so it pays to shop around.
- Lenders may also ask for a valuation on the property. If there is a difference between the purchase price and the valuation, lenders usually work out how much they'll lend on the lower figure. As a rule, if borrowing more than 80% or buying privately the bank will insist on a registered valuation.
Talking to one or more lenders or to a local mortgage broker can give a good idea of the lending limits for the types of property you want to buy and the area you want to buy in.
Most lenders will want you to have a cash deposit to put towards your home. People are usually more committed to keeping up repayments on a loan if some of their own money is invested in the property from the start.
Whether the cash is money saved or a gift from a family member doesn't matter to most lenders. Most won’t accept deposits raised through loans. This would raise your financial commitments and make it tougher for you to meet all your payments.
However, if you are borrowing 95% of the property’s value a bank is likely to want to see the deposit as being saved, not received as a gift.
For many of us, house prices seem to be rising faster than we can save. To help, people who can afford mortgage repayments but are unable to save the 20% deposit now required by most lenders may be eligible for a First Home Loan. The lending criteria are different to standard loans; there are income and house price limits.
Members of the KiwiSaver scheme may also become eligible, after three years of contributing, for a First Home grant. This is in addition to a first home savings withdrawal option, also available after three years’ membership.
For more information on how KiwiSaver can help first home buyers, visit the Kāinga Ora website.
Anyone who’s been chased by debt collectors for things like missed hire purchase payments or an unpaid power bill probably has this recorded on their credit report.
Because of this, lenders may only lend them a lower proportion of the property price, or may turn them down altogether. Someone who can’t get a loan from standard lenders may have better success with a specialist in higher-risk loans. These lenders are usually only accessible through a mortgage broker and the total cost of borrowing is likely to be higher.