How much can you borrow for your home loan?

“How much can I borrow?” It’s the big question for first-home buyers who are faced with sometimes eye-wateringly expensive homes.

Most first home buyers borrow up to 80% of an existing home or more if it’s brand new. Your situation may well be different, but not necessarily for the better.

The first thing to understand is that lenders are restricted by “loan-to-value ratio (LVR) rules”. Put simply most first home buyers need a 20% deposit on an existing home and can borrow the remaining 80%. These limits on lenders are set by the Reserve Bank of New Zealand and affect the amount you can borrow.

In some exceptional cases, banks are allowed to lend more than that for a small percentage of buyers. Typically, you will only qualify for that higher lending if you have no consumer debt and are in a good financial space, says Geoff Bawden, mortgage adviser at Bawden Consulting.

What effect can banks’ lending criteria have?

The nature of your use of the property, your outgoings, and your ability to make repayments are all things that banks consider when you put in your loan application.

Obtaining an offer of finance can be tough if the banks’ lending requirements, the type of property you want to buy, and your financial profile don’t match up.

For example, should your first home be an investment property, which can happen, you’ll need a 40% deposit and can therefore only borrow 60%. Banks are only allowed to lend up to 5% investment loans at higher LVRS. This would put you in a pretty tough position if you don’t have the ability to independently make up the difference.

While banks’ lending isn’t restricted currently on brand new homes brought before, or within six months of completion, they’re conservative in their lending. This means that your chances of borrowing 90 or 95% are slim. Additionally, the government is considering a “debt-toincome” rule, which will mean that you can only borrow a certain number of times that of your income.

What banks consider when it comes to mortgage repayments

The next important calculation when it comes to how much you can borrow is “serviceability”. That’s the amount the lenders

calculate that you (and your partner if you’re buying together) can afford to borrow and repay. Different banks have slightly different serviceability criteria, says Bawden.

To calculate serviceability, lenders need to understand their customers’ complete financial position, says TSB’S General Manager of Customers Solutions and Service, Sean Edwards. “(That) means finding out what their income is, and what their expenses are. Things like rent, power, food, any buy now pay later payments. We’ll ask our customers to provide documents like bank statements and bills to confirm this information. We’ll also check their credit history.”

Plenty of banks have repayments calculators that you can plug your outgoings and your borrowing into that will give you a better idea of how positioned you are to meet the commitments of a mortgage. However, note that this type of calculator is only intended as an estimate - speak to someone at your bank of choice directly if you’re wanting to take things further.

Every little bit counts, so Edwards notes that “a quick tip for first home buyers would be to review and consider cancelling any unused credit cards before applying for a loan as that’s part of our credit evaluation.”

What do you need to do when applying for your home loan

When you visit a mortgage adviser or your bank’s mobile mortgage lender, you’re going to start with a kōrero about you, your dreams of home ownership, and your finances

You’ll be asked how much cash you have for a deposit and where it has come from, says Bawden. Lenders look more kindly at you if

you’ve saved the deposit yourself. Banks are nervous about COVID lockdowns and other economic fallout from the pandemic, and you may need a letter from your employer that your job is safe. Your credit record, which outlines how good you are at paying bills also plays a part.

All this is crucial so that banks can crunch the numbers to establish your borrowing power. If you’re earning a salary and have no consumer debt, it’s straightforward. Life isn’t always that simple, however. You may earn a commission or own your own business. Maybe you’ve not long returned from overseas and haven’t had time to start saving.

If you find you’re not quite there yet, your adviser or mortgage manager can outline what you need to do to become more bankable, says Bawden. That might be saving a bigger deposit, paying off consumer debt, or cleaning up your credit record by settling old scores with lenders. It may only take a few more months before you’re over the line and into a home and getting reliable financial advice from trusted sources like banks and brokers could help you reach that destination sooner.

Finally, do check out the First Home Grant scheme, which if you qualify will enable you to buy your first home on a 5% instead of the usual 20%. You’ll still borrow through a bank with a First Home Loan, but Kāinga Ora, underwrites the loan.

All clued up on home loans and mortgages? Move on to the next part of your property journey with our first home buyers hub - learn how to use a Kiwisaver withdrawal for your first home, or check out our tips on what every new homeowner should have.