People are contacting their banks and mortgage brokers asking if they can afford to buy their first home.
There is real concern especially in Auckland where house prices are rising faster than people are able to save and combine this with the loan-to-value ratio (LVR) restrictions introduced in October 2013 which have created a lot of confusion about what is required for the deposit on your first home.
The belief is low deposit home loans no longer exist – wrong!
Discussion about the affordability of buying your first home is good, but I put together this to provide some clarity and hopefully helpful advice which should help you determine if you’re ready to buy their first home now, or if you need to make some changes first.
Of course we can always discuss an individual situation too as every persons situation is going to be different.
How Much Deposit Will First Home Buyers Need?
However, most lenders have loan products that still allow you to borrow up to 90% of the property value. Reserve Bank regulations allow for 10% of a lender’s home loan customers to have an LVR of over 80% and there are some exceptions too.
If you don’t have a 20% deposit and need to borrow more than the 80% threshold you should speak to a mortgage adviser who can talk you through your options which may include;
Banks – The Reserve Bank regulations allow for 10% of a banks new home loan customers to have less than a 20% deposit, so they can still offer some low deposit home loans.
Welcome Home Loans – through some banks Housing New Zealand also offers a Welcome Home Loan that requires a 10% deposit rather than the standard 20% deposit. Your mortgage broker will be able to help you arrange the application to one of these banks which include Co-Operative Bank, SBS Bank, TSB Bank, Westpac and some others.
Non-Bank Lenders – some of the non-bank lenders are able to offer low deposit home loans or will allow 2nd mortgages so you can get a home with a smaller deposit. Most of these non-bank lenders only offer home loans through selected mortgage brokers so you want to ensure that you deal with reputable brokers like Mortgage Link who are able to offer all the choices.
Create Your Budget
Create a budget to determine what you can realistically afford to spend on mortgage repayments. Your budget should include all your regular outgoing expenses along with estimates for the cost of ownership of a home (insurance, rates, interest on your mortgage, applicable body corporate charges and maintenance for your home). These costs will vary depending on where you live and the type of home you wish to buy.
You also need to be realistic and include additional regular expenses that might come up, like schooling, mortgage protection cover etc and any lump-sum costs like repairs you want to do or furniture etc… Also consider what would happen if you went down to a single income for a period of time due to redundancy, pregnancy etc.
Use online budgeting tools such as those found on the Sorted website or use an online budgeting system like PocketSmith where you can set up a budget and more importantly monitor your spending to ensure that you stick to the budget that you set.
Use A Mortgage Calculator
Once you have worked out your budget, you can use a home loan repayment calculator to get an idea of what your mortgage repayments would be.
With the Mortgage Link calculator you select the purchase price and the deposit which calculates the amount of finance required. You then select the annual interest rate which we suggest you round up a little to factor in any future interest rate increases. Finally you select the term of the mortgage which can be anywhere up to 30-years, but again it is interesting to select a lesser term and see how the repayments differ.
Of course in most situations the repayment figure will be higher than you are used to paying in rent but the benefit is that instead of being an ongoing and increasing expense, your mortgage repayment is paying off the home loan so that one day you will own your home freehold; that is with no home loan.
With your budget you can work out what you can afford to pay each month and thus determine the mortgage that you can afford. Be careful to be realistic with any budget and consider all those “one-off” expenses that are often forgotten.
It is then time to start looking at the actual finance approval. If the figure is a little higher than you are comfortable with then you may want to speak with a mortgage broker about ways to reduce the repayments (like paying interest only for a period of time, consolidating other debt or finding a lower interest rate) or increasing your household income to compensate.
Increasing income can often be done where a property has space for a boarder, a flatmate or student, where there might be some welfare assistance or you could look at doing extra hours, a home business or a part-time job.
Pre-Approved Home Loans
Most people will approach the bank to get finance pre-approved and therefore you will know what price range you can look at for your new home – or so people think.
The problem with going directly to the banks is that you are presented with just the options that the particular bank offers and this may even mean that you are told that you cannot get a mortgage for the home you want.
Today people are learning that the better option is to approach a mortgage broker who has knowledge and access to home loans from a variety of lenders and can therefore usually find a home loan to suit.
Mortgage advisers can help you find the best options and the best deals from the banks and non-bank lenders to suit your individual needs.
Your first home is one of the most significant investment decisions you will make and you want to make sure that you know the different ways you can structure your loan and what the different lenders will offer you.
There are many mortgage brokers in New Zealand, but you want to ensure that the mortgage broker ill work in your best interests which means they should not be owned by bank or real estate company and needs to have the choice of lenders for you.
You will find that mortgage brokers like Mike Pero, Roost, New Zealand Home Loans, Mortgage Express and others are owned by banks or real estate companies, whereas others like Mortgage Link are independently owned by the brokers who operate as mortgage brokers.
Of course, I work as a mortgage broker for Mortgage Link.
Financing Your First Home
Banks and other lenders want to provide finance for you, but also have to go through a process to ensure that you are deemed a good risk.
They mainly look at four areas;
- Your Deposit – this shows how much money you are willing to invest in your new home and the higher the amount the less risk to the bank or other lender.Along with your savings, there are other sources that can help to supplement your first home deposit; KiwiSaver offers first home buyers the opportunity to withdraw their savings and KiwiSaver members should also look into the scheme’s deposit subsidy. Family are often also able to help, but you need to be careful with how the money is provided and the paperwork used especially if there are guarantees.
- Your Income – you need to be able to afford the mortgage repayments both now and in the future even if interest rates increase. For this reason banks and non-bank lenders look at how you receive income and then assume a higher interest rate to assess affordability. All the banks and lenders have a slightly different way of calculating this and therefore while one bank might say you cannot afford a certain level of home loan another bank may be happy to give you that amount of lending.Some of the more professional mortgage brokers have the banks assessment tools built into their own assessment software which makes determining the right lender much easier.
- Your History – it is important that you do not have any ‘bad credit’ which is based on past lending and payment of bills. Banks and other lenders will do a credit check with Veda and most of the better mortgage brokers will pre-empt this and do a credit check first so that any issues can be addressed. Sometimes there are reasons why there may be something on your credit check and if addressed and explained at the outset you have a better chance of getting an approval.
- The Property – the banks and lenders do not treat all properties the same. There are some areas of New Zealand where they will limit the level of borrowing as they deem it too hard to sell the property, and then there are certain styles of properties that they are not keen on especially anything that could have a weather tightness issue.
Bank staff will collect all this information and send it away to the credit assessment team within the bank to get an approval. It is often better to have a mortgage broker to do this for you as they have access to more choice and are typically able to present your application better which gives a better chance of a positive outcome.
It may seem like the easy and fun part now that you’ve got your finances sorted and know how much you can afford to invest in your first home, but it can often be hard to find your dream home within the budget.
There are individual real estate company websites but the more popular way of searching online for property is suing websites like Trade Me or RealEstate.co.nz which have listings from all of the real estate companies and private sellers.
At times houses will be for sale by negotiation or going to be taken to auction and therefore it is more difficult to determine the value from which you can make an offer. In this case you may want to get a registered valuer to assess the property or some mortgage brokers have access to software and can provide you a report of recent sales in the area so you can make a more informed decision.
A real estate agent will be able to assist you with the process of purchasing your new home and both a mortgage broker and your solicitor can assist with advice.
It may seem like a lot of stuff, but most people agree that home ownership is a good thing for the whole family and therefore we believe it is worth making the effort.