Our beginner’s guides are quick and simple explainers on everyday money topics hitting headlines right now. This week, we look at what it takes to finance your first home.
With the average house in New Zealand now worth more than $900,000, the reality for most New Zealanders is it’s getting harder and harder to get on the property ladder. But for those lucky enough to be in a position to even consider homeownership, there are plenty of costs to take into account which could save or add thousands of dollars. Here are just a few things to consider before deciding to take the plunge.
What, where and why
Whether you’re single, a couple, or a family with three kids, the first step is figuring out what you actually want in a home, not just in that moment but also in the long term. How much space do you need? Are you planning to have children or adopt pets? What city or town do you want to live in? These are all crucial aspects of figuring out how much you should be prepared to spend – a newly built four-bedroom house with a backyard and pool in Auckland’s inner city is going to be in a significantly different price bracket to a two-bedroom townhouse on the West Coast.
Mortgages and deposits
As this will likely be the single biggest purchase of your life, you’ll probably need to take out a mortgage (aka a home loan) from a bank or financial institution to be able to afford to purchase your home. Taking out a mortgage means you’ll be lent a set amount of money that you’ll have to pay back – with interest – over a period of time.
Mortgages often require a deposit of 10% to 20% of the value of the home, and while that doesn’t sound like much on paper, 20% on an $900,000 home is $180,000 which, frankly, is a lot for the average person.
Having a solid amount of money for a deposit (as well as other factors such as your income level) can make a huge difference in the long term since the higher your deposit as a percentage of your house price, the better the mortgage deal you can get.
Luckily for first home buyers, there’s the option of withdrawing from your KiwiSaver and, in some cases, applying for the KiwiSaver HomeStart Grant. For a first-home withdrawal, you can apply to withdraw most of your savings as long as you: a) have been a KiwiSaver member for at least three years, b) intend to live in the property yourself, and c) leave at least $1,000 in your account.
To apply, you’ll need to complete the first home withdrawal application form provided to you by your KiwiSaver scheme provider. You’ll also need to get a solicitor to confirm that the funds will be used for the deposit or final settlement of your home and whose bank account the funds will initially be paid into, usually your solicitor’s trust account.
Finding the best deal
Choosing the lowest-cost home loan and repaying it quickly can save thousands of dollars in the long run, which means whittling down your options from the dozens on offer. Things to consider include the interest rate (which can be fixed, floating, or both) and the establishment fee (which is designed to cover the paperwork involved in setting up a mortgage).
In order to get the best deal, it’s also recommended you shop around (there’s no obligation to go with your regular bank), negotiate (for example, another bank may offer a better rate on the condition that you switch your accounts to them) and only borrow what you need (some lenders may try and tempt you into borrowing more).
Typically, a lender will require evidence of your income through three months of bank statements, and your current financial position based on your savings, expenses and assets. The loan amount you’re approved for will depend on all these factors as they indicate the level of debt you’re able to service.
If you’re overwhelmed by the process and prefer to have some help along the way, using a mortgage broker is a helpful option. Mortgage brokers not only work to find you the best deal on the market, but also advise you on everything you need to know about the house-buying process. Most mortgage brokers don’t charge for their services as they’re paid a commission by the lender, but make sure you confirm that before engaging with them.
If you haven’t already hired a solicitor or conveyancer, you’ll definitely need to at some point in the house buying process. As well as helping you apply for any KiwiSaver withdrawals or grants, lawyers can also review other vague legal or technical information in the buying process, such as the sale and purchase agreement which will specify the terms and conditions of the purchase set by the vendor. They’ll also make sure that all legal processes are followed and check over property reports, such as the Land Information Memorandums (LIM) which is a summary of any information held by the local council about the property.
House hunting and additional fees
Once you’ve been pre-approved for a home loan (which helps put you in a better negotiating position, helps speed up the mortgage documentation process, and enables you to bid with confidence at auctions), it’s time to ramp up the property search process. Around this time, there are various additional costs you may also want or need to consider. Some of these outlined and estimated by MoneyHub include:
- Valuation fees: A valuation can help you get a more accurate picture of a property’s value than those on websites like QV.co.nz or homes.co.nz. A valuation can cost between $500 to $1,000 depending on the home size and specs.
- Building inspection fees: To avoid buying a problem home, it can make sense to invest in a property inspection report or LIM report, which can check for things like moisture, leaks, and plumbing or electrical issues. Building inspections can cost between $500 to $2,000 depending on the location or size of the property and the number of optional tests you agree to.
- Body corporate fees: If you’re buying into a body corporate (which is pretty common for apartments), there’ll be annual fees for maintaining the property, running the lifts, common space repairs, building insurance, and a host of other things. It’s super important to get any annual charges in writing before buying.
- Repairs and removals: This will depend on the state of the home, but if you know the lights need fixing or the backyard needs clearing, get estimates before you commit so you don’t find yourself stuck with unexpected or ongoing bills.
Making an offer
There are two types of offers you can make for a prospective home: conditional and unconditional. A conditional offer is an offer to buy with conditions attached (for example, arranging finance or being satisfied with a building report you arrange). An unconditional offer is a straightforward offer to buy according to the terms set out in the contract.
If you’re buying at auction or making a pre-auction offer, you can only make an unconditional offer. Because you’ll be liable for financial penalties if you decide to back out, it’s highly recommended you only make an unconditional offer once the property’s been sufficiently looked over by a lawyer, a building inspector and other parties that can help ensure you make the right decision.