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A beginner's guide for first-home buyers, part one: what to do before you start looking

Recently, many YIJU New Zealand readers have been fortunate enough to receive a one-off resident visa. Alongside their excitement, many are also feeling deeply uncertain. With little knowledge of the property market, they do not know where to begin their first-home buying journey. Starting with this article, YIJU will answer newcomers' questions and help them achieve their dream of home ownership sooner.

Recently, many YIJU New Zealand readers have been fortunate enough to receive a one-off resident visa. Alongside their excitement, many are also feeling deeply uncertain. With little knowledge of the property market, they do not know where to begin their first-home buying journey. Starting with this article, YIJU will answer newcomers' questions and help them achieve their dream of home ownership sooner.

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Many people think the first step in buying a home is to start looking for one. In fact, it is not.

Before viewing properties, buyers really need to set their own budget, particularly with mortgage rates and inflation rising. First-home buyers should speak with a bank or an experienced mortgage adviser to calculate how much they can borrow and what their repayments would be, based on their circumstances. This helps establish a realistic purchase price range and assess their ability to meet repayments.

 

How much can I borrow from a bank?

 

To work out what price you can afford to pay for a home, you need to assess your financial circumstances. The mortgage adviser team at well-known local firm Jiayuan Finance suggests that first-home buyers start by using the affordability calculators available on many banks' websites to estimate their borrowing and monthly repayments, then speak with an experienced mortgage adviser about the next steps.

 

Useful websites (copy into your browser):

• Sorted.org.nz

• Westpac home loan affordability calculator:

www.westpac.co.nz/home-loans-mortgages/tools-resources/how-much-can-i-afford/

 

• ASB affordability calculator:

www.asb.co.nz/home-loans-mortgages/calculator-borrowing.html

 

• BNZ affordability calculator:

www.bnz.co.nz/personal-banking/home-loans/calculators/how-much-can-i-borrow

 

• ANZ borrowing calculator:

tools.anz.co.nz/home-loans/borrowing-calculator

 

In most cases, buyers need a 20% deposit to purchase a property, or 10% for a new build. First-home buyers who meet certain income and property price thresholds and qualify for Kāinga Ora's First Home Loan support and First Home Partner scheme may be able to buy their first home with a 5% deposit.

 

Jiayuan Finance's mortgage advisers remind buyers that they can include KiwiSaver and other investments alongside bank savings when calculating their deposit.

 

Supplementing your income to make repayments easier

 

First-home buyers can generally seek supplementary income to help cover mortgage repayments. Comparing a sole purchase with a purchase as a couple, if 100% of the mortgage is in one person's name, the borrowing limit is based entirely on that person's income and expenses. Clearly, two incomes make repayments much easier than one. In other words, a joint mortgage application with a partner or family member will generally qualify for a larger loan than a sole application, as the bank calculates borrowing capacity using the applicants' combined income and expenses.

 

If borrowers plan to take in tenants, rental income can also be included in mortgage calculations. However, banks will not count all of that income.

 

Why consult a bank or mortgage adviser?

According to Jiayuan Finance's mortgage advisers, the firm does not charge clients a service fee in most cases, because banks pay advisers a percentage-based commission after settlement. If an applicant's circumstances are more complicated and borrowing is only possible through a non-bank lender, the adviser will charge a fee agreed with the applicant in advance.

 

An experienced mortgage adviser will design the most suitable loan structure for borrowers' actual financial circumstances, ensuring there are no problems with the application or repayment affordability.

 

How much you can borrow is not solely up to the bank. In recent years, the Reserve Bank of New Zealand has introduced a range of assessment measures and policies to control lending risk. Here are some terms first-home buyers need to understand:

 

Loan-to-value ratios (LVRs): the percentage of a property's value a commercial bank is willing to lend. An LVR of 80% means the borrower needs a 20% deposit.

 

Debt-to-income ratio (DTI): commercial banks assess lending amounts as a multiple of a borrower's income, such as 6 times their salary.

 

Credit Contracts and Consumer Finance Act (CCCFA): the Government requires commercial banks to lend responsibly and ensure home buyers can afford their loans.

 

Servicing Sensitivity Rate: put simply, this is the interest rate banks use to assess borrowers' ability to make future repayments. It is generally 2% above the bank's standard rate.

 

What mortgage term should you choose?

 

Most first-home buyers choose the maximum mortgage term of 30 years, because repayments on the same loan amount are considerably lower than over a shorter term. However, a longer mortgage term means paying more interest over the life of the loan. Jiayuan Finance's advisers recommend paying more than the minimum repayment if clients can afford it, because higher repayments or a shorter loan term can substantially reduce total interest costs.

 

KiwiSaver home-buying grants

 

First-home buyers who have belonged to KiwiSaver for a qualifying period and meet certain annual income criteria may be eligible for a grant towards their first home. The grant ranges from $3000 to $20000, depending on factors including how long they have participated in KiwiSaver, whether they are buying a new build, and whether they are buying alone or as a couple.

 

Upfront costs you may face when buying a home

 

First-home buyers often assume that the deposit is their only upfront cost. In fact, several substantial hidden expenses also need to be included in the purchase budget. These include:

 

  • Solicitor and legal fees: generally $1000 to $1500 

  • Building inspection report: at least NZ$400 per inspection 

  • Council LIM (Land Information Memorandum) report: approximately NZ$300 

  • Registered valuer's report: approximately $700 to $1000

 

Unfortunately, if a purchase falls through and buyers need to find another suitable property, they will have to pay building inspection, legal and other related fees again. Yet this may also be fortunate: a comprehensive building inspection report and a professional solicitor can help buyers avoid purchasing a problem property that will be difficult to sell later.

 

Buying a home is a major life decision. For inexperienced first-home buyers in particular, the terminology and complicated processes can be overwhelming.

 

YIJU New Zealand will continue updating its home-buying guides for first-home buyers. Stay tuned.