First Home Archives - Mortgage Advisers - Mortgage Lab

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.

Bonus Tip

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.

Summary

You can start getting ready to buy today by:

 

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:

Start Shopping:

Some Auction Terminology

If You Win The Auction

The week before Settlement:

The day before Settlement:

Settlement Day:

Congratulations!  You’ve bought yourself a house!!

If you have less than 20% deposit, you are referred to (by the banks) as a Low Equity (or Deposit) Borrower.  You are required to meet a different set of criteria to borrowers with 20% or more.

Understanding the requirements from the banks is confusing.  We’ve come up with the most common questions to try to make it all easier.

How much is the absolute minimum deposit that I need?

The ideal deposit for any purchase is 20% but typically, the minimum required is 10% for an existing property and 5% for a new-build.  Note: your income needs to be very good for a 5% deposit but it is possible.  You’ll also need to explain why you haven’t saved more on your good income (for example, you’ve been paying down debt).

I heard banks weren’t lending to people with less than 20% deposit any more?

Banks can only lend out 10% of their total lending to “Low Equity Borrowers”.  Note: this is likely to change from January 2018 based on the Reserve Banks latest announcements.

This means, if you are a Low Equity Borrower and you want to borrow $500,000, the bank has to lend out another $4,500,000 to other “High Equity” Borrowers.  Each bank regularly decides (usually weekly but it can be daily) if they have enough to lend out so often a “no” today can be a “yes” tomorrow.  The short answer is, main banks are still lending to Low Equity Borrowers but it depends on the day.

Another alternative is to use the Welcome Home Loan facility.  This facility is exempt from the bank restraints but you must meet certain criteria.  We have a brief article on the criteria for the Welcome Home Loan that you can read here.

Can I be gifted my entire deposit or do I need savings?

The banks want to see that you are responsible with your money.  If you have been renting and have not been able to save money, then are you likely to pay down you mortgage?  Most banks, therefore, require that you have saved at least 5% of the purchase price.  So if you are buying a $500,000 home, you would need to have saved $25,000 on your own.  The rest of your deposit can be gifted by a parent.

What counts as “savings”?

What doesn’t count as “savings”?

Can I get a loan from my parents rather than a gift?

Yes, that’s perfectly ok.  As long as you can afford the required repayments to your parents and the mortgage payments, the bank will be ok with it.  Usually, the loan from your parents would be over 5 years which can lead to quite high payments though so do your calculations first.

Summary:

A 5% deposit is the minimum you typically need for construction lending.  A 10% deposit is the minimum required for existing homes.  Most banks don’t allow a pre-approval for Low Deposit Borrowers so you have to have an offer accepted on a property before you can apply.

 

Previously, we’ve looked at the difference between HomeStart Grants and KiwiSaver.  Another, often confused, pairing is the Welcome Home Loan facility and the HomeStart Grant.  They are both run by Housing NZ but are actually very different.

Welcome Home Loan

Most banks have a very low dollar amount that they can lend to home buyers (of existing homes) with less than 20% deposit.  The Welcome Home Loan allows first home buyers to be able to easily buy with less than 20% deposit.  They must, however, meet certain criteria.

There are 3 criteria that you generally have to meet:

Generally, if you meet this criteria, you can apply for a mortgage through the Welcome Home Loan.  The criteria is slightly stricter than a normal bank but you will get a pre-approval when the main banks are unable to lend.

HomeStart Grant

The HomeStart Grant has exactly the same eligibility which is why it is so often confused with the Welcome Home Loan.  The grant is money that is given by Housing NZ to first home buyers to help boost their deposit.

The amount that you receive as a grant depends on how long you have been in KiwiSaver; you can see how this gets confusing.  You will receive $1,000 per year that you have been in KiwiSaver (a minimum of $3,000 and a maximum of $5,000).  This amount doubles if you are buying a new home and is per person. In other words, you could receive up to $20,000 if 2 people have both been in KiwiSaver for at least 5 years and are purchasing a new home.

Summary

The Welcome Home Loan is a facility that allows you to apply for a mortgage if you have less than 20% deposit.

The HomeStart Grant is a grant that helps boost the deposit of first home buyers.

Both have the same purchasing and income criteria.  The HomeStart Grant has a few additional criteria to do with KiwiSaver.

First home buyers are often nervous about the size of their Student Loan and how it will affect their chance of getting a mortgage.  But how much does it really matter?

So, you’ve studied hard for many years and, to get there, you received a Student Loan.  For your courses, for your books, and for some money to live on.  Now you have a deposit for a house and a Student Loan of 4 times that!  How can you tell the bank your Student Loan is going to take you longer than your mortgage to pay off?

The 2 Hurdles

If you read our blogs often, you will know that people usually face one of two hurdles when getting a mortgage.  A Deposit Hurdle (you don’t have enough deposit) or an Income Hurdle (you don’t have enough income to cover all expenses).

Student Loans reduce your income (the government takes out 12% of your salary once you earn more than $19,084 per year).  The banks simply take that amount off your income when they’re calculating how much you can afford.  Basically, a Student Loan makes it so you hit the Income Hurdle earlier.

It actually doesn’t matter how much you owe on your Student Loan.  The bank will reduce your “useable” income regardless.  This is great news for those of you with eye-watering Loans.  The calculation is the same whether you $3,000 or $300,000 remaining.  The bank simply doesn’t care.  They would care if you had a $300,000 Credit Card (obviously) but not a Student Loan.  Why?  Because your payments will always be 12% of your income and no more.  The government can’t call your loan in and the payments are made automatically.  It’s even interest-free, as long as you stay in the country.  It is as close to good debt as you can get.

So don’t be embarrassed about the size of your loan.  We’ll adjust your income and work with it.

Further tip: If you are hitting the Income Hurdle (you have enough deposit but your income is holding you back) and only have a small Student Loan left, consider paying off that Student Loan.  Sure, you’re paying off an Interest Free loan which isn’t ideal, but you’ll get a 12% income boost which might get you what you need.

Property prices have increased significantly over the past few years.  It can be tempting for buyers to be on the hunt for a bargain.  For most buyers, nothing says “desperate seller” more than a mortgagee sale.  This is typically an owner, or owners, that have been unable to pay their mortgage and the bank is now selling the property on their behalf.

There are some things that a buyer, particularly a first home buyer, needs to be careful of when purchasing a property under mortgagee sale.  We spoke to Kate Chivers from McVeagh Fleming Lawyers who had the following to say:

Mortgagee sales really are a case of buyer beware. A purchaser would essentially be purchasing a property on an “as is, where is” basis.

It’s important for a Buyer to realise that there will be no guarantee that the property purchased will come with vacant possession. On settlement the purchaser may be left to evict a tenant or even the previous owner.  This can be time consuming and costly. The purchaser might not get keys for the property on settlement and even if keys were available, we would recommend that the purchaser engaged a locksmith to change the locks. There have been instances where the sitting tenant or owner has maliciously damaged property subject to sale and this could be another unexpected cost a potential purchaser may have to attend to.

Prior to purchase there may not be the opportunity to view the property or complete an adequate level of due diligence. Even if viewings were available, things could change without the purchasers knowledge prior to settlement. Such changes would most likely be outside the purchasers control and would be unlikely to be compensated by the mortgagee.

We would expect to see the standard form ADLS sale and purchase agreement heavily modified most of these modifications are likely to be designed to protect the mortgagee such as exclusions to the standard vendor warranties. This means a purchaser would have no recourse if, after settlement, they subsequently found, for example, unconsented works or malicious damage.

Summary:

We realise Mortgagee Sale properties can be tempting and if the risks are positively mitigated then it may result in the purchase of a property at a bargain price.  We recommend you to engage a lawyer with experience in mortgagee sales early in the process and before making any offer to purchase.  Getting professional advice will help mitigate the risks and save you a lot of trouble and cost in the longer term.

 

Further Reading:

Not sure how much you need to put towards your first home?  We discuss deposit requirements in this article.

If you have less than 20% deposit, you are referred to (by the banks) as a Low Equity (or Deposit) Borrower.  You are required to meet a different set of criteria to borrowers with 20% or more.

Understanding the requirements from the banks is confusing.  We’ve come up with the most common questions to try to make it all easier.

How much is the absolute minimum deposit that I need?

The ideal deposit for any purchase is 20% but typically, the minimum required is 10% for an existing property and 5% for a new-build.  Note: your income needs to be very good for a 5% deposit but it is possible.  You’ll also need to explain why you haven’t saved more on your good income (for example, you’ve been paying down debt).

I heard banks weren’t lending to people with less than 20% deposit any more?

Banks can only lend out 10% of their total lending to “Low Equity Borrowers”.  This means, if you are a Low Equity Borrower and you want to borrow $500,000, the bank has to lend out another $4,500,000 to other “High Equity” Borrowers.  Each bank regularly decides (usually weekly but it can be daily) if they have enough to lend out so often a “no” today can be a “yes” tomorrow.  The short answer is, main banks are still lending to Low Equity Borrowers but it depends on the day.

Can I be gifted my entire deposit or do I need savings?

The banks want to see that you are responsible with your money.  If you have been renting and have not been able to save money, then are you likely to pay down you mortgage?  Most banks, therefore, require that you have saved at least 5% of the purchase price.  So if you are buying a $500,000 home, you would need to have saved $25,000 on your own.  The rest of your deposit can be gifted by a parent.

What counts as “savings”?

What doesn’t count as “savings”?

Can I get a loan from my parents rather than a gift?

Yes, that’s perfectly ok.  As long as you can afford the required repayments to your parents and the mortgage payments, the bank will be ok with it.  Usually, the loan from your parents would be over 5 years which can lead to quite high payments though so do your calculations first.

Summary:

In summary, a 5% deposit is the minimum typically need for construction lending.  A 10% deposit is the minimum required for existing homes.  Most banks don’t allow a pre-approval for Low Deposit Borrowers so you have to have an offer accepted on a property before you can apply though.