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Deposit Options

Saved deposit

5% deposit

Most lenders still need  borrowers  applying for their first home loan to come up with the first 5% of the purchase price as a saved deposit. This 5% should ideally have been saved over the last 3-6 months.This saving could have been achieved in a New Zealand based bank account or even an overseas bank account.If the savings has been achieved in an overseas bank account or has come from other forms of savings instruments overseas,you need to establish a paper trail that is accepted by lenders.

Lenders may require additional information in relation to your savings history and your current  employment. There may also be some restrictions on the type of property being purchased.

One option available to borrowers with a 5% deposit is to top it up by another 5% to make it a 10% deposit . The top-up can be by way of a gift from family or even a loan that needs to be repaid.As long as 5% is saved as required by the lender, the lender generally accepts the additional deposit as long as there is a straightforward explanation on the source.

Gifted deposit OR a “Loan”

Contribution to the deposit from family members can be in the form of a gift (this is quite common amongst Indian families) or it can be an interest-free loan. The lender has to be informed of the source of the (additional) deposit funds. Some families would elect to treat the deposit amount as a loan for different reasons. You should talk to your accountant about the possible tax implications if you are gifting a deposit. You should seek advice from your solicitor of the property relationship act and it’s affect on the gifted deposit. Your solicitor should also provide you with a Deed of Debt( if the deposit has been borrowed from family) that is generally acceptable to the lenders.


Close family members also have the option to act as a guarantor. Guarantors should generally be in a healthy financial position. They should currently be working or be self-employed ,and have enough equity in their property to be able to guarantee up to 20% of your mortgage. The combined value of the deposit guarantee & their mortgage should be under 80% of the value of their property. Once a guarantee of 20% is accepted, it is secured against the guarantor’s property. As a guarantor you do not need to provide any cash towards the property purchase but your property is used as security. The thing to understand here is that the new loan is set up with the lender that holds your property.

What are the Risks for you as Guarantor?

You could potentially lose your property if the new borrower/s is in arrears with their loan. It is in your interest to monitor the loan where you have guaranteed the deposit. Lenders do not like to wait but it is quite common that the borrower/s is almost 2-3 months behind in their mortgage repayments before a lender will issue a formal arrears notice. The lender should also keep you in the loop about this development. If you have been monitoring the loan, you will be aware of the situation and try to remedy it soon enough to avoid a mortgagee sale. It takes about 4-5 months of loan arrears before the lender takes the property to a mortgagee sale.

Loan Documents generally do not specify which property will be sold first at the mortgagee sale; the lender will sell the other property first as that property makes up most of the new loan value. Lenders normally will help find a solution before the mortgagee sale is reached, especially when there is a guarantor property involved. However, after selling the other property, if there is a shortfall in the mortgage arrears (which by this time will include unpaid interest, legal & administration costs) the lender will ask the guarantor to make up for the shortfall.

How do you avoid this risk? You cannot avoid this risk but can put in place measures to minimise the possibility of this happening. Our insurance advisers will talk to you about your options in this space.

What if I want to sell my house?

The Guarantor’s property will have a mortgage secured over it & linked to the other property. If you want to sell or need to sell your property, the lender can transfer the security to another property you may own, or you can use some of the proceeds from the sale of your property to replace the deposit guarantee.

How we can Help

We will ensure that the mortgage is manageable for the new borrowers. We cover possible risks for both you and the borrowers. We work with the borrowers towards reducing your guarantee within a manageable & achievable time frame.

Second Mortgages Can Help-The Mechanics

There are instances where the primary lender will allow a 2nd mortgage to be registered- two mortgages are put in place. This is very rare given the current state of the market. In this situation, the prime lender lends up to a maximum of 80% of the property value. The 2nd mortgage is for another 10% while the borrower puts in the rest. This kind of an arrangement need not necessarily be an expensive one. If the 2nd mortgage is competitively priced, this can be an affordable way of moving forward. The thing to remember here is that the 2nd mortgage has a short term (normally a maximum of 5 years) & comes at an additional cost to the borrower in terms of upfront fees & higher interest rates.

2nd mortgages are an option to consider when the main lender feels there is a risk in your loan proposal. Talk to us if you feel your profile needs this kind of arrangement.

For higher risk lending we sometimes use a prime lender for the first mortgage (the first mortgagee has first priority over the property), and arrange a second mortgage with a finance company.

The First Mortgage will be up to 80% of the property value for owner-occupied and 70% for Investment Property. The Second Mortgage then fills the gap all the way up to 90%. You will still need a 10% deposit.

Doing a Second Mortgage can surprisingly be cost effective.

All lenders price for risk. The riskier a deal, the more you will pay. If you are borrowing over 80% you will typically pay an extra 0.50% and 1.00%. This applies to the whole mortgage. With two lenders involved there is no premium on the first mortgage. There is a large premium built into the second mortgage. Second mortgages cost up to 14%pa, but you need to look at the overall interest rate and repayments before comparing to other options.

 We structure the first mortgage as interest-only so that the more expensive second mortgage is repaid first. This keeps your increase in borrowing costs to an absolute minimum.

The monthly repayments are not materially different from what you would pay normally. (In the real example above the difference is $18 per month.)

Second mortgage can be repaid as quickly as you like (including lump sums.) So after six months, if the property value has increased above your purchase price, we can consider increasing the first mortgage to repay the second mortgage.

Benefits of a Second Mortgage

You can buy now versus save and buy later.

  • Second mortgages can be cost effective if set up properly.
  • 2nd Mortgage Providers generally have a higher risk appetite than the bank.
  • 2nd Mortgage Providers are less pedantic than banks with their lending criteria.
  • They will lend even if you are using a smaller deposit (you will normally still need at least a 10% deposit.)
  • The main mortgage relationship is still with the First Mortgagee who is lending at prime rates (remember that the First mortgagee has to agree to the 2nd mortgage)
  • The First mortgage provider will almost always have a better product choice, pricing and accessibility than the finance company.
  • The second mortgage should ideally be repaid rapidly reducing your interest costs.

Vendor Finance

Vendor Finance is where the seller leaves equity in the property (as a second mortgage.) It is a loan and must be paid back. Ideally the vendor finance is charged at a market based interest rate. Vendor Finance is trickier and only really works for people with no deposit but high incomes and no other debts.

From time to time we come across vendor finance deals. If you are interested let us know.

The market has got a bit tougher for First Home Buyers that don’t have a deposit, especially if you have other debts! One way of getting around this is using a parent as a guarantor. Another option is for the vendor to leave behind a deposit in the property.

How does Vendor Finance work?

You agree a sale price with the vendor which needs to be no more than a current registered valuation of the property. You only pay 80% of the sale price with the remainder treated as a second mortgage repayable over 5 years).

So if you buy a place for $300,000 we arrange a mortgage with a lender for $240,000.  It is interest-only to keep repayments as low as possible.  We then arrange the $60,000 vendor finance as a second mortgage that is fully repaid over 5 years.  The vendor finance will have a commercial interest rate on it of say 6.00%-8.00% so can be a nice little earner for the vendor. It is not for everyone, but if you are interested in looking at vendor finance options give us a call us to discuss. In the current housing market, some vendors are more open to exploring vendor finance. These vendors are generally holding stock that they need to offload. If you are considering vendor finance, it is essential that you get a good price, proper advice and make sure that you are not being sold a lemon.

Ring us today for the best advice on mortgages!

0800 728 474