Buying your first home is an exciting milestone, but navigating the world of home loans can feel very overwhelming. With so many terms, lenders, regulations, and options to consider, it’s easy to get lost along the way. In this article we break down the essentials so you can feel confident about securing the right loan and making your dream of homeownership a reality. From Loan-to-Value Ratios (LVRs) and interest rates to government schemes like KiwiSaver; we’ll walk you through everything you need to know to get started. Whether you’re saving for a deposit, comparing mortgage types, or applying for your first loan, this guide will help you make informed decisions every step of the way.
What is LVR?
Loan-to-Value Ratio (LVR) is a measure used by banks to assess the amount of a loan in relation to the value of the property being purchased. It’s expressed as a percentage. For instance, if you buy a house worth $500,000 and take out a $400,000 mortgage, the LVR is 80%. Banks use LVR to determine how much risk they are taking when approving a loan. A lower LVR indicates that the borrower has provided a larger deposit, which reduces the risk to the bank (lender).
What LVR is Acceptable?
Lenders prefer an LVR of 80% or lower for first home loans, meaning buyers are expected to have a 20% deposit. However, exceptions are made for certain groups such as first-home buyers, so if you have a lower deposit amount, say 10%, and for some banks 5%, the bank can approve these on a case by case basis.
Watch our video and learn more about LVR here:
What are LEP Fees?
LEP stands for low equity premium. This is a one-off upfront fee, often added to the total loan amount at settlement. It can range from 0.25% to 2% of the loan amount, depending on the size of the deposit. Once paid, it’s non-refundable and does not affect the ongoing interest rate of the mortgage.
What are LEM Fees?
LEM stands for low equity margin fees. Instead of a single fee, this is an additional percentage added to the interest rate. The size of the margin varies based on the borrower’s LVR, with higher margins applied to loans with smaller deposits (e.g., 0.25% to 1.75% per year). This margin remains until the borrower builds at least 20% equity, either by paying down the loan or through property value appreciation
Watch our video and learn more about LEP and LEM fees here:
How do I use my KiwiSaver to buy a house?
If you’ve been a KiwiSaver member for at least three years, you can withdraw almost all of your savings, personal contributions, employer contributions, and government credits bar aside from leaving $1,000 in the account for your first home. The funds can go towards purchasing a home, a new build, or land to build on, as long as the property is your primary residence for at least six months.
To use your KiwiSaver for the deposit, contact your provider early to request pre-approval. After your offer is accepted, submit a withdrawal form with your purchase agreement and ID. Your solicitor will manage the process, which can take 10–15 working days, so make sure your sale agreement accounts for this.
Watch our video and learn more about withdrawing from your KiwiSaver here:
What are some short-term debt mistakes that may be costing me home loan pre-approval?
First-home buyers often fall into the trap of taking on too much short-term debt leading up to the home-buying process, which can hinder their ability to secure a mortgage.
The best advice is to keep things simple and avoid short term debt altogether. When you borrow money on a credit card, personal loan, car loan or have progress payments set up through apps such as AfterPay, the banks mark this as debt you have against your income and it could affect your ability to service your mortgage; even if you seldom use credit cards or progress payments, the bank will still mark this as a big fat cross when it comes to your lending ability, so if you can get rid of them prior to apply for pre-approval, please do!
Watch our video and learn more about short term debt mistakes here:
If you’re needing some help with gaining pre-approval for your first home purchase or have a few more questions for us, get in touch with us and we’ll help you put your best foot forward with the bank.
