First home buyers have been increasingly active in the housing market over the last few months, borrowing $1.344 billion in new mortgages in August. This was up 45.6% on the $923 million of new mortgages they took out in August last year, according to the latest Reserve Bank of New Zealand (RBNZ) figures.
They are also taking a bigger share of the market, accounting for 19.8% of all new residential mortgage lending in August compared to 17.1% in August last year and 15.4% in August 2018.
The main driver appears to have been the ongoing falls in mortgage interest rates, with the average of the standard two year fixed rates offered by the major banks dropping from 3.70% in August last year to 2.72% in August this year.
The RBNZ's removal of loan-to-value ratio restrictions on new mortgage lending earlier this year, making it easier for borrowers to get a mortgage with less than a standard 20% deposit, appears to have had less of an effect on the market.
The amount of new mortgages taken out by first home buyers with less than a 20% deposit accounted for 44.3% of the total new mortgage lending to first home buyers in May this year. That dropped back to 42.8% in June, 42.9% in July and 41.2% in August, which was less than in August last year when 41.8% of lending to first home buyers was low deposit lending.
Even so, the figures suggest that around four out of 10 first home buyers are getting into their homes with less than the standard 20% deposit. The obvious benefit of buying a home with a low deposit is that its gets you into your own home sooner.
It would take half the time to save a 10% deposit as it would to save a 20% deposit, all other things being equal.
But there are disadvantages too.
Banks will generally charge higher mortgage interest rates to buyers with less than a 20% deposit, pushing up their mortgage payments, and because they will have less equity in their home, they have less wriggle room to restructure their mortgage if interest rates went up significantly, or if they suffered a major loss of income.
But at least 40% of first home buyers are deciding that those are risks worth taking.
To get a feel on how that might work out for them in the long term, interest.co.nz did a 10 year financial comparison of buying a home with a 10% deposit versus buying with a 20% deposit.
In June 2010 the Real Estate Institute of New Zealand's national lower quartile selling price was $253,000.
Ten years later in June 2020, the lower quartile price had increased to $452,000, up 79% in 10 years.
Over the same period of time, the average of the standard two year fixed mortgage rates charged by the major banks had more than halved, falling from 7.19% in June 2010 to 2.76% in June 2020.
If someone had bought a home at the June 2010 median of $253,000 with a 10% deposit, they would have needed a mortgage of $227,700.
Because that would have been a low equity loan, interest.co.nz estimates that their average mortgage interest rate over 10 years would have been 6.35%, compared to 5.14% if they'd purchased with a 20% deposit.
That means their total mortgage payments over the 10 years would have been about $169,904, with $35,333 of that being principal repayments and $134,571 in interest payments.
That means they would still owe $192,366 on their mortgage after 10 years.
Because the value of their home would have increased to $452,000 over the same period, their equity in their home would be $259,634, or 57% of its value, which is not a bad financial situation to be in.
If the same buyers had purchased the same home with a 20% deposit, their average mortgage interest rate over the 10 years would have been about 5.14%.
That means their total mortgage payments over that period would have been around $132,376, which is $37,528 less than the buyers with a 10% deposit.
They would also owe just $165,370 on their mortgage after 10 years, giving them total equity of $286,630, or 63% of their home's value.
So the buyers with a 20% deposit were better off on two fronts.
They faced lower mortgage payments, leaving them with an extra $37,528 to save or spend over 10 years, and they ended up with more equity in their home.
So yes, they would be better off than the buyers with a 10% deposit.
The main impact on the buyers with a 10% deposit is that over the 10 years, their mortgage payments would have averaged around $72 a week more than if they'd had a 20% deposit, but they'd still have a respectable amount of equity in their home after 10 years.
So its understandable that many first home buyers are opting to take the plunge with less than a 20% deposit.
Although that does carry extra risk, if they are comfortable with the effect that has on their mortgage payments, you can see why many are deciding it's a risk worth taking.
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