Five steps to help you on your way to home ownership
Buying your first home can be tricky. Even if the increase in property values has pulled back a little recently, for many, purchasing your first home can still seem like a far-fetched pipedream. Despite this, home ownership is still achievable – and with some forethought and smart money management, buying your first home could be closer than you think.
Planning for your first home purchase involves five key factors:
1. Manage Your Cashflow
Living pay-to-pay? This is all too common a situation amongst New Zealanders – and without some big life changes, is a tough cycle to break.
Managing your money doesn’t necessarily mean budgeting. It means knowing what your financial commitments are and where your money is going once it lands in your bank account. If you have existing debts, such as a credit card or car loan, directing any spare cash towards paying these off will go a long way in freeing up extra in the long-term – it’s easy to forget that due to interest these debts always cost you more than the amount that you borrowed! The lower you can get your outgoing expenses, the more you can funnel into savings. Some tips to get these as low as possible include living with parents (if you have the option), walking or cycling instead of driving, cancelling any unnecessary subscriptions (do you really need Netflix, Disney+, Sky, Amazon Prime Video, and Lightbox?), and cutting back a little on the morning coffees and Friday night drinks. To put it in perspective, a takeaway coffee a day (with an average cost of $6 per coffee, five days a week), adds up to $1,560 per year. If you’re a couple, that’s $3,120!
No matter where you cut back on your spending, managing your cashflow doesn’t mean being so frugal you’re going without. It’s better to be realistic about your habits and trim them back slowly to get the most long-term gain.
If you can, try to boost your income. Consider a side-hustle, or striving for a bonus, promotion, or pay rise via your main career. Every little bit you can earn can be added to a larger deposit, or to improve your cashflow moving forwards.
2. Use KiwiSaver and Other Assistance
Hopefully you’re already enrolled in a KiwiSaver Scheme. If not, it’s not too late to enrol.
Think of a KiwiSaver investment as a bit like compulsory savings – but easier – because you never have the money in your bank account to redirect elsewhere. On top of what you (and your employer) put in, the Government will contribute 50c for every $1 you save, up to a maximum of $521 per year. When you’re ready to purchase, you can withdraw all but $1,000 from a KiwiSaver investment to use towards your first home deposit. As well as using KiwiSaver funds, you could be eligible for a KiwiSaver First Home Grant. This can provide $5,000 to 10,000 towards your deposit, depending on the home.
The Bank of Mum and Dad
If you’re in the position to do so, it might also pay to ask the ‘bank of mum and dad’ for assistance. There is recognition that a first home purchase isn’t as straightforward as it was 20 or 30 years ago, when parents often first purchased, which is why many parents might be willing to help. If you go down this route, ensure you take specialist advice to ensure expectations of all parties are crystal clear, and are legally sound!
3. Know Your Costs
The cost of home buying doesn’t just involve the purchase price of the home. There will probably be property inspection fees, builders' report fees, removal fees, and lawyer fees that all rapidly add up.
In addition to these costs, you need to consider the annual rates and insurance – as all lenders take these costs into account when assessing your borrowing power. You can utilise regional council sites for rates assessments, which also contain basic property data such as land and dwelling size – two major factors when insurers quote for house insurance. Whenever you find a property you are interested in, be sure to run checks on both these costs and account for them in your expenses. Ongoing maintenance costs also need to be thought about – what happens if a tap leaks? Or a door falls off its hinge? Will you need to pay someone to mow your lawns? Whatever your answers, set aside a sum for unexpected DIY and maintenance costs.
Looking ahead, be sure you have money set aside for contingencies and maintenance, and then plan on it being a semi-regular expense. One contingency that’s worth considering is if mortgage rates go up – will you still be able to afford your repayments? When you apply for a mortgage, the banks will test your expected cashflow against what rates might rise to, though you’ll need to accept the possibility of this and be prepared to adjust your lifestyle to meet higher mortgage repayments!
4. Get Pre-approval
It’s an excellent idea to get pre-approval for your mortgage before you start house hunting. Not only does this save you the disappointment of falling in love with a house you can’t afford, but it also means you have a limit you absolutely have to stick to – and the more you come under that limit, the less maxed out your borrowing capacity will be.
How much you can borrow depends on:
• Your income, including the stability of that income
• The value of the home you are looking to buy
• Your deposit
• Your credit history
• Your ability to repay your home loan after you've paid your outgoings
5. Build Your Team of Experts (The A-team)
Buying a property is one of the biggest financial decisions you’re ever going to make. Therefore, it is smart to surround yourself with the right team of experts to help you along the way.
So, who should be in your team?
The Mortgage Adviser (Broker)
The New Zealand lending and mortgage market is a dynamic and rapidly changing environment. Assorted rules and regulations – such as taxpayer-funded support available to first home buyers, shifting LVR limits – and also the requirements of different retail banks (such as ANZ or ASB) all change so often it’s hard to keep up. A good mortgage broker will be by your side throughout the entire purchasing process, including helping navigate this ever-evolving regulatory and banking environment.
The mortgage broker can also assess different lenders (banks) and see where you’re probably best placed to obtain a mortgage. This will save you time, stress, and not cost you a cent.
Mortgage brokers will ask you to complete a standard application just once to find the best lender for you. Their primary purpose is to match the borrower’s unique requirements to a specific lender and products, and assist you through the process. In addition, they are often able to negotiate a more competitive offer (interest rates and possibly cashback) for you – the borrower.
To have a complimentary initial chat with a mortgage broker, get in touch.
Here are examples of how your lawyer (solicitor) or conveyancer can help:
Sale and Purchase Agreement
They should review the agreement before it is signed. They will want to make sure it contains standard terms, make sure there isn't anything unusual, explain key risks, and make sure the deal is documented correctly.
Most sale and purchase agreements include conditions around a building report, LIM, and sometimes other matters. A lawyer or conveyancer can help with these conditions.
A lawyer or conveyancer can help you with both withdrawing KiwiSaver funds and Homestart Grants.
Record of Title
Do a title search and advise you on any information which affects you as the buyer, including easements, covenants, consent notices and other matters.
LIM Report and Council Files
If there is a LIM condition (and even sometimes when there is not) the lawyer or conveyancer should help you order a LIM, and help you review building permits, code compliance, utilities, supply, and other issues.
Transfer and Mortgage Documents
Most property deals include mortgage and loan documents. There are also documents to sign to become owner of the property. Your lawyer or conveyancer should talk you through these in language you can understand.
Ensure the purchase price ends up in the right place.
The Buyers’ Agent
You should be talking to several different real estate agents to get a good sense of the housing market you intend to buy in.
If you genuinely lack the time to hunt for a property, you could consider using a buyer’s agent to do some of the leg work for you. This means they’ll visit the properties for you and help shortlist the ones that might suit your requirements. This will cost you, but if you are particularly inexperienced with the market, it could save you a lot of time and effort.
Most banks now require a professional valuation before they’ll confirm borrowing for the purchase. Even if they didn’t, the valuation might cost $600 - $1000, which is a reasonably small sum for the peace of mind of knowing you’re not overpaying for a property which may cost a million dollars, or more!
Depending on the home you’d like to purchase, other professionals may need to be involved. This might include specialists such as building or engineering inspectors.
Some of these reports might seem costly at first, but in the context of a million-dollar transaction, the cost of getting things wrong is far more expensive! Unfortunately, New Zealand has a mixed reputation for housing quality. The potential issues go beyond leaky buildings - there is meth contamination and all sorts of other nasties. These professionals can help you to avoid buying a problem home.
First Home Buying - The Bottom Line
The five key steps to buying your first home include:
1. Cashflow management. This will enable you to accumulate a sizeable deposit and prepare you to start repaying a mortgage.
2. Using KiwiSaver and other assistance. Maximising the benefits available will either reduce the lending you need or may enable you to buy a home you otherwise couldn’t.
3. Know your costs. This will ensure there are no surprises.
4. Get pre-approval. To ensure you have realistic expectations, do this before you set foot in an open home.
5. Build your team of experts (the A-team). To assist you with the process and smooth the inevitable bumps you’ll be sure to encounter.
For more detail on this topic, simply get in touch – it would be our pleasure to assist.