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
Mainstream banks have started to respond to the LVR (Loan to Value Ratio) restrictions following the Reserve Bank’s announcement on November 29th 2017.
LVR on Investment properties
Most major banks have indicated that, as of 1st January 2018, they will begin lending up to 65% on investment properties (up from 60% this year).
Let’s say a couple have their own house and want to buy an investment property, both valued at $500,000. Previously they could borrow up to 80% on their own home ($400,000) and 60% on the new investment property ($300,000). In other words, the total borrowing on their $1 million property portfolio would be $700,000.
As of the 1st January 2018, the same couple will be able to borrow $400,000 on their own home as before. But now they will be able to borrow $325,000 (65% LVR) for a total borrowing of $725,000.
Is this enough?
With the new rules, it is slightly easier to borrow to purchase an investment property. It won’t open the flood gates but buyers who are currently just short of being able to buy may find themselves back in the market. I think this is exactly the outcome that the Reserve Bank are hoping for.
Low (high LVR) Deposit Buyers
There has been some confusion around this change of policy. Currently, 10% of any bank’s new owner-occupied mortgages can be lent to clients with less than 20% deposit. In other words, those with higher than 80% LVR.
The LVR mark is still 80% however the banks can now lend up to 15% of their new owner-occupied mortgages to low deposit buyers.
And banks are already indicating how this is going to change. One bank, who has recently declined almost all mortgages over 85%, has indicated that they are now more prepared to look at up to 90% again.
Is this enough?
A mere 5% increase in available lending doesn’t sound like much. But the question has to be asked, what percentage of lending goes to low deposit buyers if there are no restrictions? Of course, it’s not 100%. A large portion of mortgages will always to be low LVR owners simply due to the nature of capital growth.
Given this, I think the change to the available lending is going to more significant than it initially sounds. And the great news is, this is going to affect first home buyers the most (for the better). This will allow those with a deposit hurdle more of a chance to get into the home they want.
Some exciting changes are happening to the property market. The 2 main changes are:
- Investment property buyers no longer require as much deposit to purchase
- Low deposit borrowers have a better chance of being able to get a mortgage if they are borrowing >80%
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”?
- Money in the bank (obviously!)
- KiwiSaver – including the amount received from the Government and your Employer
- The HomeStart Grant (if you meet the criteria)
- A bonus from your Salary
What doesn’t count as “savings”?
- Money available on your Credit Card (lots of people try to withdraw it to use as a deposit)
- Debts that are being repaid unless you can prove the original loan and show an agreement
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.
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.
Calculating the amount of interest expected in a progress-payment contract on a newly built house can sometimes seem daunting. In this article, we walk you through some easy calculations.
Recently we discussed the difference between Turn-Key construction contracts and Progress-Payment construction contracts. You don’t need to worry about interest payments for Turn-Key contracts. They are built into the price, which is why they tend to be more expensive. The builder has calculated how much interest he or she will pay and added it on to the price of the contract.
But for Progress-Payment contracts, you begin paying money from the minute you settle on the section, and as you continue to draw down money throughout the build project. So how much should you allow for interest costs for the project?
Let’s use an example project to work through some numbers.
Section cost: $300,000
Cost to build: $400,000
Time to build: 8 months
So the section is going to settle, for example, on 1st March and, 8 months later, the house is expected to be built. How much interest would we expect to pay?
From Day 1, we’re going to be paying interest on the section. Let’s assume we will pay around 5% interest on $300,000 for 8 months.
$300,000 * 0.05 (interest) = $15,000 interest in a year
$15,000 /12 (months) = $1,250 per month
$1,250 * 8 months = $10,000
So the section is going to cost us around $10,000 in interest to hold for 8 months.
The builders aren’t going to ask you for a lot of money on Day 1 for the build. Remember, it’s a Progress-Payment contract so they will only ask you for money once they’ve completed the work.
In the beginning of the project, in other words, you won’t be paying any interest on the build part but by the end, you’ll have drawn down all the money. If you average this out, it amounts to you owing half the build cost over the whole project. What does that mean?
In this instance, you could calculate half the build cost ($400,000 divided by 2 = $200,000) and see how much interest you would pay over that amount for 8 months.
$400,000 (build cost) / 2 = $200,000
$200,000 * 0.05 (interest) = $10,000 interest per year
$10,000 / 12 (months) = $833 interest per month
$833 * 8 (months) = $6,666 interest total for 8 months
So, for an 8 month build, we know that:
The section will cost us $10,000 of interest
The build portion will cost us $6,666 of interest
The total cost of interest for this project will be approximately $16,666. Correct?
Actually, not quite. In my opinion, it’s very rare for a construction company to finish a project on time or early. If the company is saying 8 months, I would add 50% to that (in this case, that would make it a year). There is a lot that is outside the control of the construction companies such as Council Permits and weather. Particularly if they are building during winter.
So even though we have calculated the interest cost to be $16,666, I would expect the interest cost to be up to $25,000 to allow for the time being stretched out.
To calculate the interest costs of a Progress-Payment contract, you need to know 3 things:
- What will the section cost?
- What will the build portion cost?
- How many months is the build likely to cost?
From there you calculate:
- The interest cost on the section
- The interest cost on half of the build cost (the average of what you will owe)
Total that all up and add some more time on to allow for unforeseen delays with construction.
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.
Thinking you’d like to be self-employed? Not sure what you’d like? Give us 30 minutes of your time and we’ll show you how easy it is to become a Mortgage Adviser.
Register for our free regular webinar and find out everything you need to know.
The Mortgage Lab is pleased to announce the latest Adviser to join our team – Howard Blackwell.
Howard has spent many years in banking at home in the UK and in the Republic of Ireland, before moving to New Zealand to continue his banking career here. Specialising in Risk, Howard brings a deep understanding of lending products and is well placed to help you navigate the risks and reap the benefits of borrowing for property purchase.
All this means that Howard can provide balanced advice to you when purchasing a new home or investment property, topping up that mortgage, restructuring or just re-fixing your interest rates.
Howard will be based primarily at our Takapuna office. You can book a time with him online here or email him HowardB@mtgelab.co.nz.
First home buyers can often get tangled up in the pile of new concepts to learn. In this article, we explore the basics of withdrawing your KiwiSaver and meeting the criteria for the Housing NZ HomeStart Grant.
Let’s start with KiwiSaver because it is a relatively simple concept. If you have been contributing for 3 years to your KiwiSaver account and have never owned a house before, you are probably able to withdraw all of your money (except the $1,000 you may have received from the government when you started).
There are exceptions – if you’ve previously owned a house, for example – but the large majority of first home buyers fall into this category… more than 3 years… first home… you’re eligible.
Notice that there is no maximum income or purchase price for a KiwiSaver withdrawal. These limits only apply to the HomeStart Grant. This grant was setup to help boost first home buyers into the market by giving them extra money to put towards their deposit.
Maximum Purchase Price for HomeStart Grant
The maximum purchase price differs depending on whether you’re buying an existing property or a new property. A new property is defined as having the Code of Compliance issued within the last 6 months. Here is a link to the criteria with Housing NZ but the summary is:
- Auckland – $600k existing house, $650k new house
- Other major towns and districts – $500k existing house, $550k new house
- Rest of NZ – $440k existing house, $450k new house
Maximum Income for HomeStart Grant
The income criteria is relatively simple to figure out.
- If you are buying by yourself, the maximum you can have earned in the past 12 months is $85,000
- If you are buying as a couple (or more), the combined maximum you can have earned in the past 12 months is $130,000
So a couple earning $130,000 (combined), buying an existing house in Auckland for $600,000 is eligible for the Housing NZ Grant. Any higher on either of those, and they are only eligible to withdraw their KiwiSaver.
How much can you receive through the HomeStart Grant?
If you meet the income and purchase criteria and are buying an existing home:
for every year you have been in KiwiSaver, you will receive $1,000 HomeStart Grant, up to a maximum of $5,000.
So if a couple have both been in KiwiSaver for 5 years each or more, they will receive a total of $10,000 ($5,000 each).
If they have both been in KiwiSaver for 3 years each they will receive $6,000 ($3,000 each).
If you meet the income and purchase criteria and are buying a new home:
The amount doubles if you are purchasing a new home. So $2,000 per year in KiwiSaver (to a maximum of $10,000).
So if a couple have both been in KiwiSaver for 5 years each or more and are purchasing a new home, they will receive a total of $20,000 ($10,000 each). If they have both been in KiwiSaver for 3 years each they will receive $12,000 ($6,000 each).
- No matter what you are purchasing or how much you earn, you are entitled to withdraw your KiwiSaver if you have been contributing for a minimum of 3 years and this is your first home
- If you are purchasing below the area threshold ($400,000 – $650,000) and earn below the income threshold ($85,000 – $130,000) you may be entitled to some additional money. This is called the HomeStart Grant and is provided by Housing NZ.
It can be a confusing process. We’re always happy to help with any questions . You can contact us here.
A common phrase in mortgage world is the “one bank trap”. It’s when you have all your lending with one bank which gives the policy makers at the bank all the power and lowers your negotiating power. If the bank’s policy changes, all your investment eggs are in the same basket.
But if you spread yourself too thin, you create a different type of nightmare.
Let’s use Joe Bloggs as an example. Let’s say he has 5 investment properties with $1.5m of mortgages. For this simple example, let’s say he has no personal debt. How should he spread his mortgages?
The One Bank Trap theory says that if all his debt is with one bank he’s exposed to their rates and their rules. He also can’t play the other banks off against each other.
But lets look at the other extreme. Spreading his 5 properties across 5 banks means he could give each bank $300k debt each (assuming all properties are equal value). But this means each bank is hardly making any money on their slice of the mortgage. He also now has 5 internet logins and a large stack of eftpos cards in his wallet.
My general rule of thumb is to give a bank around $1m of lending and then look around for another bank. In this case he might give the first bank 3 properties and $900k of lending. This would certainly put him in the “preferred category” and would also mean he is likely to get the best rates.
He can then diversify the rest of his borrowing to a second bank. He might give them $600k and using the first bank’s rates to negotiate the second bank lower.
In summary, become a premium client with one bank by borrowing more than, or close to, $1m. Once you’re there, begin to diversify. Don’t get too hung up on the One Bank Trap before you need to.