First Home Archives - Mortgage Advisers - Mortgage Lab

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:

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:

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.

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Article updated: 16th July 2018

Have you heard about KiwiBuild?  Jacinda Ardern’s Labour government is promoting it’s programme to build 100,000 affordable homes and apartments over the next 10 years.  Here’s what we know so far and our predictions for the KiwiBuild programme.

How to register your interest for KiwiBuild

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.

Of the 100,000 KiwiBuild dwellings, 50% will be in the Auckland area with the remainder spread throughout the country.  This seems reasonable as the main demand pressure has historically been on Auckland. The government has indicated it will achieve this 100,000 target by utilising crown-owned land and purchasing new homes / apartments directly from developers.  This will be similar to their acquisition of State Housing that has gone on for decades now.  Developers will most likely get priority treatment for the consent process if they agree to selling a percentage of their development at an “affordable” rate. 

What price are the houses going to sell for?

The current indication is that houses will sell for stepped prices in Auckland and Queenstown:

Anywhere else in the country will have a maximum price cap of $500,000.

The now closed SHA Scheme also allowed priority council consent if 10% of any development met the affordable criteria.  In this case, the level determined as affordable was a complicated calculation of the median sales in the area which often ended up as a bizarre number like $541,811.  And it was continuously changing.  It’s great to see the government is going with an easy to remember, round numbers figure this time.

What about income levels?  Do I earn too much?

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 from normal applications that take just the current salary.  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.

What other restrictions does KiwiBuild have?

The rules for on-selling the property are looking to tighten.  Currently, to use your KiwiSaver, you just have to commit to living in the property for 6 months.  Until recently, no one was even checking this although lately a dozen or so people have been found to be living elsewhere and received penalties for this.  

With the new KiwiBuild programme, purchasers (or rather, ballot winners) will need to apply to the government in order to sell the property in less than 3 years.  It’s likely the government will only allow this in serious financial cases and will probably take the equity you have made.  In my opinion, this is a great way to tackle the issue.  It’s easy to monitor, and doesn’t force people to continue living in the house under duress as long as they are prepared to walk away from any capital gains.

I think the main problem is going to be finding 100,000 houses in the next 10 years.  Not just finding the land but also finding developers that are prepared to sell part of their project for, what could easily be, below the cost to build.  

Let’s look at the 50,000 new affordable houses and apartments in Auckland.  And let’s imagine every single (!) developer opted to sell 10% of their development under the KiwiBuild programme.  That would mean we need 500,000 new houses and apartments to be built in Auckland in the next 10 years (or 50,000 new dwellings in Auckland per year).  The current all time high for nationwide consents is 40,000 in 1967… Nationwide!  It just doesn’t seem likely that Auckland is suddenly going to go from approximately 9,000 consents in 2016 to 50,000 consents in 2019. 

You can read the Statistics New Zealand report here.

Maybe it’s a stretch goal; which is fine by the way.  And any attempt to get first home buyers into affordable homes is a great goal.  Other feedback from property industry professionals has questioned the ability to find the labour required to complete the KiwiBuild programme.  

At the end of the day, we hope the government can achieve this goal, maybe through some amazing change in council efficiency and vigorous training towards labour.  We’ll certainly be looking forward to helping 100,000 families into new affordable homes!

Now what?

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.

  1. Check your eligibility for KiwiBuild Scheme
  2. Enter your details into the registration form here
  3. Begin the process of getting pre-approved for a mortgage

 

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:

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.

Income Caps

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.

Owner-Occupied Home

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.

Price Caps

If you live in Auckland or Queenstown, there is 3 levels of pricing for houses.

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.

Now what?

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.

  1. Check your eligibility for KiwiBuild Scheme
  2. Enter your details into the registration form here
  3. Begin the process of getting pre-approved for a mortgage

Our thoughts

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.

Tuesday 22nd May – 5:30pm (Seminar begins 6pm) –

Not sure where to start with your first home purchase? What do you need to prepare? Are you unsure how much you need for a deposit? Or how the HomeStart Grant works?

Join us for our 1 hour seminar with CEO of The Mortgage Lab and author of “The Successful First Home Buyers Guide“, Rupert Gough.

It doesn’t matter if you are about to purchase your first home or you are going to purchase in the next few years. This is the seminar to get you ready.

This seminar will include:

There will also be an opportunity for questions at the end.

Doors open at 5:30pm. The seminar will start at 6pm and take an hour or so with plenty of opportunity to ask questions at the end. Parking is available at Smales Farm.

Note: we will not be selling any products and there is no sales talk. This is an information evening to educate first home buyers through their purchase. We have 2 ticket options – a completely free ticket or a donation to our favourite charity – the “I Have A Dream” Charitable Trust.

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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.