By Greg Ninness

Typical first home buyers in most parts of New Zealand would now have trouble scraping together a 20% deposit for a modest home, according to interest.co.nz's Home Loan Affordability Reports.

The reports track the median wages of couples aged 25-29 throughout the country, and calculate how much they would have saved for a deposit on a modest home if they set aside 20% of their after tax pay each week for four years.

When interest.co.nz first started publishing the Home Loan Affordability Reports in 2004, that rate of saving over four years would have been sufficient to provide a 20% deposit on a home purchased at the Real Estate Institute of New Zealand's lower quartile selling price in all regions of the country.

But by the end of last year that rate of saving for four years would provide a 20% deposit on a lower quartile-priced home in just four regions - Taranaki, Manawatu/Whanganui, Canterbury and Southland.

In Auckland, which is the least affordable region in the country with a lower quartile selling price of $692,000 in December last year, the first home buying couple would only have saved enough over four years for a deposit equivalent to 11.2% of the purchase price.

Other regions where the deposit ratio falls short of 20% of the lower quartile selling price are Northland 18.2%, Waikato 16.3%, Bay of Plenty 14.5%, Hawke's Bay 16.0%, Wellington 14.4%, Nelson/Marlborough 15.2% and Otago 19.3%.

That presents aspiring first home buyers with a difficult dilemma.

Although first home buyers could get a mortgage if they have less than a 20% deposit, they would probably not qualify for the special low interest rates banks commonly promote to attract mortgage customers.

So if the deposit was less than 20%, the buyers would generally have to pay a higher interest rate and the difference can be significant.

For example, a bank may advertise a special mortgage rate of 3.39%.

But buyers with a deposit of less than 20% would not be eligible for that rate and would probably have to pay the bank's standard mortgage rate of say 4.55% for the same term.

So if a couple were wanting to buy a home at the REINZ's national lower quartile price of $450,000 and had a 20% deposit ($90,000), they would probably be eligible for a mortgage at the special rate of 3.39%, which would require mortgage payments of around $734 a fortnight (for a 30 year term).

But if they only had a 15% deposit ($67,500), they would probably have to pay interest of around 4.55%, which would push the fortnightly payments up to about $897, an extra $163 a fortnight.

In areas with very high housing costs such as Auckland, the situation for first home buyers is even worse.

At the end of last year the REINZ's lower quartile selling price in Auckland was $692,000.

If a couple had a 20% deposit ($138,400) for a home at that price they would probably qualify for a mortgage at the special rate of 3.39%, which would require mortgage payments of around $1128 a fortnight (for a 30 year term). But if they only had a 15% deposit ($103,800) and had to pay an interest rate of 4.55%, the mortgage payments would be pushed up to about $1380 a fortnight, an extra $252 a fortnight. On top of that, banks may require buyers with less than a 20% deposit to take out mortgage or income protection insurance, increasing their costs further.

Underlying this problem is the fact that house prices have risen at a much faster rate than incomes. In the 10 years from December 2009 to December 2019, the REINZ's national lower quartile house price increased by 76%, from $255,000 to $450,000. But over the same period, the combined national median take home pay for couples aged 25-29 (where both work full time), increased by just 27.7%, from $1302.65 a week to $1663.32 a week.

In high cost regions like Auckland the difference is even more stark, with Auckland's lower quartile price increasing by 94% over the same period, from $357,000 to $692,000, while the median take home pay for Auckland couples only increased by just 25%, from $1355.95 a week to $1696.000 a week.

So although interest rates may be at record lows, many first home buyers in most parts of the country will still struggle to purchase a home unless they are are on higher than average incomes, because they will find it difficult to scrape together a sufficient deposit for even a relatively modest home.

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