Welcome to our First Home Buyers Questions and Answers session.
Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new? What a waste of time! Our Q&A session means you get answers to all the questions you have.
Our Panel includes:
- Rupert Gough – CEO of The Mortgage Lab and author of The Successful First Home Buyer
- Mat Page – CEO of Financial Design Group
- Ann Cochrane – Legal Executive for Simpson Western
- Cynthia Klenner – Harcourts Real Estate Agent – Glenfield
There will be no sales talk; nothing to buy; nothing to sign up to on the night. This is an information night so you can get all your questions answered.
Some topics we’ll most likely cover:
- KiwiBuild – what is it?
- HomeStart Grant and KiwiSaver basics
- What can you afford? How can you prepare for getting a mortgage?
- When do you get your Solicitor involved?How does the auction process work?
- How does purchasing work if you are borrowing over 80%?
Feel free to come with as many questions as you like. You should leave the session comfortable to move forward with the house buying process.
Doors open at 6pm and we will get questions started at 6:15pm. Parking is available in all Financial Design carparks outside. Come along early to grab some nibbles.
In recent years, the Reserve Bank of New Zealand has implemented a host of rules on the banks, particularly around mortgages. These rules have several purposes.
Some of them, like the LVR restrictions, are to stop the bubble mania of 2008 from happening again. The days of lending 100% (or more) on a property are gone and not returning any time soon.
Some of the new rules, like the Responsible Lending Code, should just always have been there. They require a lender to be able to hand-on-heart say that they were acting responsibly in granting a loan to the client. Banks are calculating a mortgage at 7.5% to allow for future interest rate rises. They also assume a 25% vacancy on rental properties which allows for some vacancies and other costs like repairs and maintenance.
These changes most often come up when a mortgage application is in, what I like to call, the “grey zone”. The clients is just on the edge of what the bank are comfortable with. Some examples of these grey zone applications are:
- bad credit history (even if it has been paid)
- >80% LVR borrowing
- significant reliance on rental income or government benefits for income
- self-managed builds
At first glance, none of these criteria are dealbreakers but the banks can only take on a certain number of these loans. They also don’t want to be known for taking on grey zone loans. If that happens, they end up holding a majority of those loans in the country which is obviously not preferred.
How do the banks decide who to give “grey zone” lending to?
Ask any Mortgage Adviser at the moment how to get a difficult application through the banks, they will answer the same way. A bank is more willing to lend to an existing customer than bring on a new customer. They have a lot more information on an existing customer and they are much more able to make informed decisions.
I have accounts with lots of banks. What constitutes an existing bank customer?
Banks count themselves as “your main bank” if your salary goes into one of their accounts. I know most of you have just seen a workaround but unfortunately this needs to have been happening for at least 3 months (sometimes 6 months). Don’t think you can change your salary payment tonight and be an existing client tomorrow.
Couples should use separate banks
It’s therefore a good strategy to have couples, who are looking to buy in the future, put their salary into different banks. You can still have a joint account but my suggestion is that you put your salaries into completely different banks and then transfer the money into the one account. Maybe put your personal spending through the different banks to really show that you are an existing customer.
With this strategy, you’ve now got 2 banks who think of you as an existing customer and are likely to be a little more lenient on you if you have to push the limits of their lending policy. A Mortgage Adviser will still be able to tell you which bank is better to approach first. Either way, with this strategy, you’ve doubled your odds of a successful outcome.
Well, the news is in and we now know a lot more about the eligibility for KiwiBuild.
The maximum income one person can earn is $120,000. For a couple (or more) the eligibility criteria states $180,000. We are assuming this will be measured in the same way as the HomeStart Grant. That is, the previous 12 months must total less than $180,000 (or $120,000). This is an important distinction. An applicant could have recently had a raise that pushes them over the limit but because they have earned less than that in the past 12 months, they will still meet the criteria for a limited time.
The purchaser must live in the house and “intend to live there for 3 years”. We can see the wording for this clause being changed to make it more restrictive. Of course, everyone will say they “intend” to live there. Potentially, a loss of capital gains would ensure that people didn’t take advantage of this.
If you live in Auckland or Queenstown, there is 3 levels of pricing for houses.
- One bedroom houses will be priced at a maximum of $500,000
- Two bedroom houses will be priced at a maximum of $600,000
- Three bedroom houses will be priced at a maximum of $650,000
Anywhere else in the country will have a maximum price cap of $500,000.
How to register your interest
After checking your eligibility for KiwiBuild, you can complete the form here to register your interest in the KiwiBuild. There are only a few questions.
When the ballot opens, you’ll want to have finance approved. Under the previous Affordable Homes Scheme, pre-approval was a requirement to enter the ballot and we don’t see this programme being any different.
- Check your eligibility for KiwiBuild Scheme
- Enter your details into the registration form here
- Begin the process of getting pre-approved for a mortgage
The government has come up with some interesting solutions to the original problems that KiwiBuild faced. It has tackled the worker shortage by investigating a migrant visa related to skills in the construction industry and seems to be looking solidly at the prefab construction market to supply the houses.
We remain skeptical regarding the possibility of being able to process the increased number of consents. One solution to this has been for the government to complete the consents “in-house” taking the pressure off the councils. This is undeniably a terrible idea. Although Councils can be slow, they still have the best knowledge on consent processes which are in place for a reason.
At the end of the day, even if this is a stretch-goal and only, for example, 70,000 new houses are created, the first home buyer market will have significantly benefited from the endeavour. It will also have served to get the pre-fabrication industry more established which will help construction long-term.
Apartments are a very tempting purchase, especially for first home buyers. They tend to be lower cost and therefore much more within reach. But there are a few things to be aware of:
If you’re looking to borrow up to 80% on an apartment, most banks prefer them to be at least 50sqm. Two banks will allow as low as 40sqm and one bank will include the balcony in that size. In general though, <50sqm is going to be more difficult.
Freehold apartments vs Leasehold apartments
A leasehold apartment buys the apartment but not the land. You lease the land off another owner so there is always a “lease payment” in addition to the ownership. This is what makes leasehold apartments appear to be so cheap. You are buying a shell that dangles 5 or so stories in the air. The problem is that the lease is eventually renewed and when it does, the cost can skyrocket. In general, leasehold apartments are for the perpetual high-income, low-deposit buyer. It would be fair to say banks much prefer freehold.
The bank will need to know what the Body Corporate payments are and factor this into your budget. Don’t be afraid of these costs. You pay a Body Corporate to maintain the outside of your building and insure your property. You were going to have to do this on a house too (replace the roof occasionally, paint the walls etc), it’s just that most people don’t put aside the money in the same way a Body Corporate does.
Banks are generally against lending higher than 80% on an apartment. This is because, if they have to sell the property from under you, there is often one or two identical apartments for sale which lowers the chance of them getting a good price.
Consider what this means for a first home buyer though. You can often borrow up to 90% on a house but only 80% on an apartment. This means, if you have $100,000 deposit (and plenty of income), you could buy a $1,000,000 home but only a $500,000 apartment. While an apartment is cheaper (try finding a $500,000 home in Auckland!) your buying power is considerably less.
Believe it or not, I’m a fan of apartments. I am a particularly hopeless DIYer and the maintenance that a Body Corporate provides suits me. They are great if security is a concern and often have other cost-saving benefits like a gym in the building. They are not for everyone though and if you are looking for an apartment, run a few examples past your mortgage adviser first to get an idea of what the banks think.
Order your Credit Report
It’s free to order your own Credit Report and is a great insight into what the bank will know about you. See what loans are recorded against your name. See what the Utility Companies say about you (if you’re late paying the Electricity company, they now note this on your Credit Report and the bank hates it).
But most importantly, see if there are any defaults marked against your name and, if they are incorrect, start the process to get it corrected. This is a long and tiring process so it’s better to know 3-4 months before you want to apply for a mortgage.
You can check your credit report at www.checkyourcredit.co.nz or creditsimple.co.nz
Find out when you’re eligible to withdraw your KiwiSaver
You need to have been contributing to a KiwiSaver for 3 years before you can withdraw it for your first home. Note the word: “contributing”. Give your KiwiSaver provider a call to see if and when you are eligible.
Take a look at the First Home Buyers Club summary of KiwiSaver Withdrawal For First Home
Ask your boss for a pay rise
Hey, why not? An additional $3,000 per year could get you a house worth $50,000 more. That can make quite a difference in some areas and could be the difference between getting your dream house or missing out on it.
Take a look at these 5 Tips For Getting A Pay Rise
Remember, when it comes to talking to a Mortgage Adviser, there is no such thing as “too early”. We prefer to get you on the right path now so when it comes to applying for finance, it all goes nice and smoothly.
Maybe you’re in Auckland with your deposit ready to go for a house. Or maybe you’re looking to purchase your next investment property. For fun, we scoped out TradeMe to see what a million dollars buys you at the moment. The difference is… vast.
It will come as little surprise to you that a million dollars doesn’t buy you a whole lot. For our largest city, you can get this 125sqm, 2 bedroom home in Point Chev. The section is 347sqm.
You get a little more bang for your million bucks in Tauranga. The section is a little bigger at 481sqm, the floor area is almost double the size at 240sqm. It has 4 bedrooms and is brand new.
At about the same floor size, a million dollars gets you a Tauranga comparable. This house is 190sqm and on a slightly larger 533sqm of land. It has 3 bedrooms, which is less than the Tauranga house but it also has what Wellington excels at… views.
As we move further down the country, a million dollars takes on a whole new meaning. Scroll up, look at that Auckland house again. Now realise that the same amount of money buys you an 898sqm section and this castle. The ad doesn’t say what the floor area is, but it has enough parking for 6 cars and the photos show enough living-room area to swing a cat.
(Additional note, Mortgage Lab does not condone cat swinging)
A million dollars buys you not one, not two but three flats in this very large property in Dunedin. With a total floor area of 390sqm, it is over 3 times the size of the Auckland property. The ad also tells of about a 10% return which I would also guess is about 3 times the Auckland property. Whether the long-run capital gains could match or even come near Auckland is the reason some will choose this villa and some will choose one of the others above.
A long-term hold
Speaking of capital gains, we thought it would be fun to see what we could have bought with a million dollars 100 years ago. It’s hard to find good property details but we did find the Statistics Yearbook from 1918 here. In 1918, you could have bought:
- All of Takapuna, Auckland for 1.1m pounds
- All of Tauranga for 263,000 pounds
- All of Karori, Wellington for 450,000 pounds
- All of Linwood, Christchurch for 1.2m pounds
- All of Roslyn, Dunedin for 1m pounds
Until recently, selling a house by Auction has been the most popular method of selling in Auckland. It takes advantage of the excitement in the market and pits buyers directly against each other. In most of the other cities and towns around NZ however, selling a house “price by negotiation” has remained one of the more popular methods. With the cool down in the Auckland housing market, we are beginning to see this trend start in our largest city too.
So what does price by negotiation mean?
Price by negotiation indicates the vendor is willing to take an offer at any time. It differs slightly from a Deadline Sale where a vendor will accept all offers up to a certain date. Price by negotiation is an open-ended timeline. However, once an offer has been submitted and conditionally accepted, further offers must wait for that initial deal to be cancelled before their offer can be accepted. Even with price by negotiation, it pays not to wait around too long.
How to get ready to make an offer?
You should ideally have your finance pre-approved before making an offer. An offer without a finance clause is a much stronger temptation for the Vendor. If you’re competing against other offers, the less conditions on the offer, the better. You all know where to click to get the pre-approval stage started!
You should always get a lawyer to check the offer before submitting it. A Sale and Purchase is a legally binding contract. Even a small mistake can cost tens of thousands of dollars.
What happens once your offer is accepted?
If you have conditions – finance, building report, valuations etc – in your offer, then you will have a set amount of time to get these ticked off before telling your Solicitor to go unconditional. At this point, you will need to pay the deposit into the bank. The deposit is usually 10% but can be varied and is not usually refundable if you want to pull out of the deal. Going unconditional is not to be taken lightly so check with your Solicitor before confirming.
There are some pros and cons of buying a Price By Negotiation property
- Your timeline can be a little more flexible than an auction
- You can agree on a price before having to pay legal fees, Registered Valuations etc
- It can be hard to know what price to offer if no indication is given
We found a nice simple process chart here courtesy of our friends at The Property Practice. We recommend you check it out before you begin organising your pre-approval.
When you’re buying a house, there are a lot of things to think about. One of the steps that is often a mystery for our clients is conveyancing; ie; what happens with their lawyer.
We spoke to Krystle Gardner from Gardner Barristers & Solicitors and asked her a few of our clients most common questions:
When do you first need to make contact with your Conveyancing Solicitor?
I strongly suggest that you make contact with your Solicitor as soon as you make the decision to start looking to purchase. Earlier is better when you are selling your existing house too.
Making contact with your Solicitor this early will mean that you can move quickly should you find a house you like. You can then confidently put an offer on it whilst also enabling your solicitor to work with you, and the Real Estate Agent, to make sure that you take all legal steps needed including the very important review and approval of the agreement for sale and purchase.
We’ve heard it can take a few days to process the legal documents. What takes so long?
Agreement for Sale and Purchase
If you are buying your new house through a negotiation process (i.e. not at auction), there are a couple of steps that need to happen. The Real Estate Agent needs to prepare the draft agreement for sale and purchase and provide this to your Solicitor to review. They will include any conditions of the purchase and approve the agreement before it is provided to the Vendor as an offer. This process can take 24 to 48 hours depending on other demands. Upon your offer being accepted by the Vendor, the condition process starts.
The condition process involves you working with your Mortgage Broker and your Solicitor to sort out a home loan with a Bank. You’ll also carry out the legal enquiries on the house to make sure it is a good investment. In addition (and at a minimum) you would also be:
- working with a builder to get a Building Report done on the house
- obtain a copy of the Land Information Memorandum from the local Council
- arranging for a Meth Inspection and,
- a Registered Valuer if the bank requires it
The timing is a little different if you are buying your new house at an Auction. In this case, your Solicitor will work with you to carry out the legal enquiries (legal due diligence) on the house well ahead of the auction. Your Solicitor will also review the Agreement for Sale and Purchase prepared by the Real Estate Agent for use at the Auction. This will mean you can confidently bid at the Auction and sign the agreement to purchase the house on the day.
Home Loan Documents
The bank, after providing your mortgage adviser with final approval of your home loan, will send your Solicitor a letter of instructions which enclose all your home loan documents. For a basic home loan structure (i.e. not involving a Trust, Company or Guarantor) these home loan documents will usually include:
- Home loan agreement(s);
- Home Loan Flexible Facility Agreement(s) (if any);
- Home loan terms and conditions;
- Authority for disbursement of funds;
- Cash contribution acknowledgement (if any); and
- Solicitor’s certificate.
Your Solicitor will review the above home loan documents, and prepare any of the documents required by the Bank. They will also the prepare the required Authority and Instruction for Electronic Registration of the Transfer and Mortgage Instruments with Landonline and the Tax Statement. It’s then time to meet your Solicitor to sign the home loan documents and these additional documents. At this meeting, they will provide you with advice on the general nature and effect of the documents. You’ll also need a copy of your photo identification.
After receiving a copy of your insurance certificate for the new house, your Solicitor will then send the home loan documents, together with the completed solicitor’s certificate to the Bank. They’ll ask that the money be drawn down to your Solicitor’s Trust Account to complete the purchase.
In my experience, after receiving the Bank loan instructions, your Solicitor will require a minimum of 48 hours to review and prepare the documents. At this point, your Solicitor will be in a position to meet with you to sign these and give you the advice referred to above. The home loan documents must, according to most Bank requirements, be returned to the Bank a minimum of 48 hours before the purchase date. This ensures any issues can be addressed without it holding up the purchase of your new house.
Should I put my house in a Trust as well? When would I need to decide that?
There are some circumstances in which it will be appropriate for your house to be put in a Trust. But there are plenty of other circumstances in which it is not appropriate. For example, the individual(s) purchasing the house intend to use part of the house as a home office or a holiday home.
Gardner Barristers & Solicitors know through experience that it is sometimes the more appropriate approach for clients to use relationship property law together with asset protection structures as the means to protect the house rather than the trust structure.
It is very important, therefore, that you seek legal advice early. This means the right ownership structure for your circumstances is decided and established before the home loan documents are prepared.
Will you help me with my KiwiSaver withdrawal?
Your solicitor will absolutely help you with your KiwiSaver withdrawal. They will also receive the money into their Trust Account to use as part of the purchase price of your house.
Krystle is the owner of Gardner Barristers & Solicitors in Auckland.
Phone: 022 395 9973
Address: P O Box 35 317, Auckland 0753
Purchasing your first home can be confusing. The key to being ready to buy is to be organised. Here are 3 things that first home buyers can do today to get ready to apply for a mortgage.
Order their Credit Report
Ordering your own credit report is free. You can a nice and simple indication from Credit Simple or you can get the whole report (I recommend this) from Equifax. This second option can take a couple of weeks (my latest one turned up in 4 days though). This will allow you to see exactly what the bank is going to see about your history. If anything isn’t correct, now is the time to address that.
Tidy up your spending
Look through your last 3 months of bank statements. Are you spending more than you earn or going beyond the limit of your bank account? This is called going into “unarranged overdraft”. To a bank, these 2 words send up a big red flag. Once is usually ok, but more than that and getting a mortgage is going to be difficult.
You can limit how often this happens by setting up a spending account with automatic payments going out. You’ll know exactly how much is going to be spent and how much is in the account.
Key point: don’t have an eftpos account attached to this expenses account. You’ll end up over spending and going into overdraft again.
You can download a copy of The Mortgage Lab’s Excel Budgeting Spreadsheet here.
Get proof of your income
The bank is going to want to see your income and it won’t usually be enough to show them the money going into your bank account. Banks like to see payslips because they show how your income is made up (ie; is it a base salary or commission). The bank will usually want to see the most recent 3 payslips so if your HR department is a little relaxed in this area, get them working on it now.
If you are self-employed, you will need to have this year’s most recent Financial Statements (between October and March). You can see our blog on when you need to update your Accounts. Since Accountants are often busy, these can sometimes take a while to source so talk to your Accountant early.
If you’re ready to apply for a mortgage, it’s also time to look at your Life and Health insurance. You’re going to be signing a contract for a large amount of money and need to make sure you can pay for it. Find an insurance adviser who you like and feel is looking after your best interests. We believe the best advisers only advise on insurance which is why we don’t offer it in our company. They should be comparing several different products and choosing the one that suits you the most.
You can start getting ready to buy today by:
- ordering and checking your Credit Report
- tidying up your spending habits and making sure you are not going into unarranged overdraft
- getting 3 of your most recent payslips or your latest set of business financials
- finding a good insurance adviser and talking to them about adequate cover
It often feels like you’re stumbling in the dark when you’re buying your first home. So we’ve compiled a list of steps you are likely to go through in your house-buying adventure when purchasing at Auction.
When You’re Ready To Start Looking:
- You’ll have a first meeting with your Mortgage Adviser. Fill in forms and give them all the documents they need
- Mortgage is submitted to the bank
- A pre-approval is issued and presented to you. This should be 5-7 days after submission.
- Tick off all conditions on the pre-approval. The last remaining condition will be the bank seeing a signed Sale and Purchase. This can’t happen until after the Auction but you need the bank to confirm they are happy with the Sale and Purchase as it is before the Auction.
- Win that Auction!
Some Auction Terminology
- Hammer Price: The last bidder price, acknowledged by the auctioneer before dropping the hammer (or gavel)
- Minimum Bid: The smallest amount that can be bid by a buyer, usually established through consultation with the seller
- Maximum Bid: The maximum bid set by a buyer who is bidding remotely (or by proxy)
- On-site Auction: An auction held at the property being sold
- Reserve Price: A price set by the seller that a buyer must reach before the seller is obligated to sell
- Sniper: A bidder that enters a last minute bid as the auction is due to be closed
If You Win The Auction
- Send the signed Sale and Purchase to your Mortgage Adviser immediately. Once you have done this, your Adviser will begin to negotiate interest rates for you.
- Meet your Mortgage Adviser and discuss the best structure for your mortgage. Documents will be sent to your Solicitor by the bank within a couple of days.
The week before Settlement:
- The bank will call you and arrange for you to come in and open all the bank accounts
- Your Solicitor will call you and arrange for you to come in and sign the documents.
The day before Settlement:
- You’ll inspect the house and confirm it is acceptable
- Your Solicitor will let you know when you the money has been transferred. You can collect the keys as soon as this has happened.
Congratulations! You’ve bought yourself a house!!