One of the biggest barriers to entry for property investment is the deposit requirements so it's good to know how much you need and where to get it from.
There are several different deposit requirements in the property market which are dependent on whether you're a first home buyer, investor, or if you’re buying a new build or an existing property (among other things).
A deposit is generally made up of cash or equity - but can also be made up of KiwiSaver, Home Start Grants, gift money, and more.
Equity is the difference between the value of your home and the outstanding debt on that property which means that you can only use equity as a deposit if you already own a property and you have sufficient 'useable equity.'
For first-home buyers, the current lending rules allow banks to lend up to 95% to purchasers, assuming their income is high enough to service that loan.
However, this is usually reserved for very high-income earners – people on a more modest income usually get 90% lending which means purchasers generally need a deposit of 10% of the purchase price.
Investors have different deposit requirements.
Investors buying a new build property needs to have a 20% deposit. This deposit usually comes in the form of equity in your own home and is what we consider “100% lending” because 20% of the lending is secured against your own home, and the remaining 80% is secured against the new property.
A new build property means you are the first owner of the property, purchased straight from the developer – if this isn’t the case, then you are dealing with existing properties.
Existing properties have a deposit requirement of 40% for investors. This requirement is a disincentive for investors because it means more of their equity is used up, making it harder to keep investing.
Consider this example:
Two investors are looking at properties priced at $670,000.
One is considering a new build and the other is considering an existing property. What are their respective deposit requirements?
Of course, because the first investor is considering a new build, they will only require $134,000 for a deposit because this is 20% of the purchase price.
On the other hand, the second investor will require $268,000 as a deposit because he requires 40% of the purchase price for a deposit.
This ultimately means that the first investor has less equity locked up in that first transaction which will allow them to invest again sooner.
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