If you’re thinking about buying your first place, start right by looking at the ins and outs of deposits, mortgages and repayments.
Be money-smart and see how your KiwiSaver could help get you on the housing ladder.
A deposit is part of the cost of a house or flat, like a payment in advance. The bigger your deposit, the smaller the mortgage you’ll need to buy a home.
You usually have to repay the money you borrow – the 'principal' – as well as the interest, which can mount up to a heap of money over the years.
So it’s worth saving as much as you can for the deposit towards your first home.
You need to make a realistic decision about the level of mortgage repayments you can afford. Home loans are based on how much you earn because you must pay back a little bit of your mortgage every month.
A good rule of thumb is that your home loan repayments shouldn’t be more than 30% of your take-home pay. So even if things change you’ll be able to make your repayments without getting into financial difficulty.
It pays to spend some time listing what all your expenses are. After you’ve added some more to cover any unexpected costs, what’s left over gives you an idea of how much you could put towards mortgage repayments.
Remember that, even if the interest rate on your mortgage is low now, it may rise. If the interest rate goes up by just 1%, it will affect how much you have to pay back.
It’s a good idea to calculate how much you’d pay if the interest rate was 2% or even 5% higher, to make sure this wouldn’t put your finances under too much strain. In the past, too many home-owners have found themselves in difficulties when the interest rate went up significantly.
First, decide on a goal for your home deposit, both the amount and the deadline.
Make sure you set – and stick to – a budget for your everyday expenses, which will help you save much quicker.
If you’re a New Zealand ‘couple’ both earning the average wage and save 20% of your combined income before tax – 'gross' income – you’ll have a 20% deposit for a $500,000 home in around 5 years. That sounds challenging but do-able, doesn't it?
You might also be able to use your KiwiSaver savings to help buy your first home. So squirrelling away any extra dollars into your KiwiSaver will really speed up reaching your deposit.
This is a ‘piece of string’ kind of question, because how much you need for your deposit depends on the price range of the houses you’re looking to buy.
Bear in mind that your first home is unlikely to be your dream home. But it gets you on the housing ladder.
When working out the price range you can afford, you need to take into account that most mortgage-lenders don’t offer home loans for the total cost of a property. Most mortgages are a percentage of a property’s value or price – the loan-to-value ratio or LVR. Most lenders offer up to 80% LVR.
So as a general rule your deposit needs to cover at least 20% of the value of the property you’re thinking of buying.
Many lenders won’t give a mortgage to first-time home buyers who’ve got a deposit of less than 20%. Although you can get a home loan with a smaller deposit, you’ll find that these mortgages tend to have higher charges, because the lender takes more risk. These higher charges often take the form of a higher interest rate and mortgage insurance you must take.
When you’re buying your first home, you might be able to get a leg up from your KiwiSaver. There are two ways you could use your KiwiSaver savings to become a home-owner.
If you’ve been a KiwiSaver member for at least 3 years, you could use your savings towards your first home. You can decide to withdraw some or all your KiwiSaver savings, as long as you leave at least $1000 in your account.
If you’re going to be buying with a partner who’s also a KiwiSaver member, both of you might be able to do this.
Even if you’ve been a home-owner before, you might be able to use your KiwiSaver savings to buy a home as a second-chance buyer. You need to contact Housing New Zealand first to get their approval for a second chance before applying for your first-home withdrawal from your KiwiSaver provider.
To apply for a first-home withdrawal, you need to meet certain conditions. So if you think this might apply to you, get in touch with your KiwiSaver Scheme provider.
If you’ve been contributing regularly to your KiwiSaver account for at least 3 years, you may also be able to take advantage of the KiwiSaver HomeStart grant.
The amount you get depends on:
You need to meet other conditions to apply for the grant. These include caps on your income and the house price.
If you’re buying with a partner who’s also a KiwiSaver member, each of you could receive a KiwiSaver HomeStart grant.
Although the grant is mainly for first-time buyers, you might still be able to get it if you’ve owned a home before, as a second-chance buyer.
Everyone needs to meet some conditions to apply, so find out more about the KiwiSaver HomeStart Grant at Housing New Zealand, which runs the scheme.
As a first-home buyer, you’re often offered good deals by mortgage-lenders who want your business. But always shop around and understand which home loan suits you best. You need to do your homework or it could cost you thousands of dollars extra.
For example, depending on your situation, you might think that knowing exactly how much you’ll be paying each month is more important than a low interest rate.
Or you may decide that a low interest rate is what you’re looking for. Bear in mind, though, that a low interest rate is great today but it may not last. If you then find that interest rates have risen, will you still be able to afford your repayments? So weigh up whether the certainty of a slightly higher rate for a longer term might be better in the end. Having a combination of fixed and floating interest rates can often be a good flexible solution.
It’s also a good idea to overpay your mortgage. This means paying as much as you can, not just the lowest amount you have to repay. Doing this cuts the total amount you repay, because you pay interest on a mortgage as well as the ‘principal’ or what you’ve borrowed, which can add up to thousands more dollars over the years.
Take some time to review your mortgage regularly. If you’ve got a fixed-rate home loan, that usually ends after a set time – either months or years – so then you need to figure out the next step. And if you start a new job or inherit some money, look at your home loan to see if it’s still the best option.
Remember that once you’ve taken out a mortgage you’re usually tied in to it for a while, which could be a few months or years.
At the end of that ‘term’ it’s unlikely that you’ll have paid off your entire home loan so you’ll have to renew or refinance your mortgage. So remember that you can choose to switch to different types of mortgage and move around to different lenders over the years.
But bear in mind that you might have to pay fees if you want to end your mortgage earlier than you first agreed or change your lender.
When you take out a home loan, you usually must buy house insurance, which covers the building. You may also want to think about getting life insurance or mortgage insurance, or both.
There are different kinds of life insurance. Term life insurance pays out a ‘lump sum’ if you die during the term of your mortgage.
Mortgage insurance covers your home loan if you need it, with the two main types being:
You may be able to get mortgage protection insurance as part of your life insurance.
If you’re thinking about taking out some insurance, it pays to look around. Your mortgage lender may offer insurance so you can easily add the cost to your home loan, but it may have restrictions so see what deals are out there.
There’s heaps to weigh up when you’re buying your first home.
As well as the cost of your home loan and deposit, you’ll have to pay fees and charges to your mortgage lender. The good news is that some fees might be waived, which means you don’t have to pay them.
Even so, you’ll have to cover other fees and charges. There are legal fees, builder’s reports and maybe a Land Information Memorandum (LIM) to pay for while you’re making an offer on a place and then buying it.
When you’re moving into your new home, remember that you might have to pay moving costs, like van hire. You’ll probably need to cover the cost of connecting the power, phone and internet.
Once you’re a home-owner, you’ll probably want to protect what’s inside your home as well as the building itself. You’ll be able to get contents insurance to cover damage, loss and theft of your things.
As a home-owner you’ll have to pay rates to your local council to help pay for local services like parks, street lighting and sewerage.
And if you buy a flat or townhouse in a housing complex, you might have to put in towards the maintenance and insurance of shared areas. You’ll need to ask a lawyer to check what you need to pay and what it covers.
Buying your first home can be difficult and confusing, so maybe some professional advice would come in handy. Speak to a mortgage broker about home loans and to a lawyer about the legal side, called ‘conveyancing’.
Remember, this is just a guide to help you start thinking about your finances and is not financial advice.
If you’d like to talk with an Authorised Financial Adviser who can look at your situation, we can put you in touch with someone in your area.