Buying your first home
If you’re thinking about buying your first place, start right by looking at the ins and outs of mortgages, deposits and other costs.
Be money-smart and see how your KiwiSaver savings could help you on the housing ladder.
Deciding how much to borrow
It might be obvious but remember that when you sign up for a mortgage you're agreeing to a loan. You have to repay the money you borrow – the principal – as well as the interest, which can mount up to a heap of money over the years.
You need to make a realistic decision about the level of mortgage repayments you can afford. Home loans are based on how much you earn because you must pay back a little bit of your mortgage every month.
Your home loan repayments shouldn’t be more than 30% of your take-home pay
A good rule of thumb is that your home loan repayments shouldn’t be more than 30% of your take-home pay. So even if things change you’ll be able to make your repayments without getting into financial difficulty.
It pays to spend some time listing what all your expenses are. After you’ve added a ‘rainy day fund’ to cover any unexpected costs, what’s left over gives you an idea of how much you could put towards mortgage repayments. Once you have this number, you can play around on a mortgage calculator to figure out what that means in terms of how much you can borrow. There are heaps of online calculators so try a few. Start with the Sorted mortage calculator.
Remember that, even if the interest rate on your mortgage is low now, it may rise. If the interest rate goes up by just 1%, it affects how much you have to pay back.
It’s a good idea to calculate how much you’d pay if the interest rate was 2% or even 5% higher, to make sure this wouldn’t put your finances under too much strain. In the past, too many home-owners have found themselves in difficulties when the interest rate went up significantly.
Also bear in mind that your expenses will be different as a home-owner. See Other Stuff to think about at the end for more.
Repaying your home loan
It’s wise to think carefully about how you'll pay back a mortgage before you apply for one.
As a first-home buyer, you’re often offered good deals by mortgage-lenders who want your business. But always shop around and understand which home loan suits you best. You need to do your homework or it could cost you thousands of dollars extra.
For example, depending on your situation, you might think that knowing exactly how much you’ll be paying each month is more important than a low interest rate.
Or you may decide that a low interest rate is what you’re looking for. But bear in mind that a low interest rate is great today but it may not last. If you then find that interest rates have risen, will you still be able to afford your repayments? So weigh up whether the certainty of a slightly higher rate for a longer term might be better in the end. Having a combination of fixed and floating interest rates can often be a good flexible solution.
It’s also a good idea to overpay your mortgage. This means paying as much as you can, not just the lowest amount you have to repay. Doing this cuts the total amount you repay, because you pay interest on a mortgage as well as the ‘principal’ or what you’ve borrowed, which can add up to thousands more dollars over the years.
Do your homework or it could cost you thousands of dollars extra
Take some time to review your mortgage regularly. If you’ve got a fixed-rate home loan, that usually ends after a set time – either months or years – so then you need to figure out the next step. And if you start a new job or inherit some money, look at your home loan to see if it’s still the best option.
Remember that once you’ve taken out a mortgage you’re usually tied in to it for a while, which could be a few months or years.
At the end of that ‘term’ it’s unlikely that you’ll have paid off your entire home loan so you’ll have to renew or refinance your mortgage. So remember that you can choose to switch to different types of mortgages and move around to different lenders over the years.
But bear in mind that you might have to pay fees if you want to end your mortgage earlier than you first agreed or change your lender.
What's a deposit?
A deposit is part of the cost of a house or flat, like a payment in advance. The bigger your deposit, the smaller the mortgage you’ll need to buy a home.
So you can see it’s worth saving as much as you can for the deposit towards your first home.
How much is a deposit?
This is a ‘piece of string’ kind of question, because how much you need for your deposit depends on the price range of the houses you’re looking to buy.
Bear in mind that your first home is unlikely to be your dream home. But it gets you on the housing ladder.
The bigger your deposit, the smaller the home loan you need
When working out the price range you can afford, you need to take into account that most mortgage-lenders don’t offer home loans for the total cost of a property. Most mortgages are a percentage of a property’s value or price – the loan-to-value ratio or LVR. Most lenders offer up to 80% LVR.
So as a general rule your deposit needs to cover at least 20% of the value of the property you’re thinking of buying.
Many lenders won’t give a mortgage to first-time home buyers with a deposit of less than 20%. Although you can get a home loan with a smaller deposit, you’ll find that these mortgages tend to have higher charges, because the lender takes more risk. These higher charges often take the form of a higher interest rate and mortgage insurance you must take.
How to save for your deposit
First, decide on a goal for your home deposit, both the amount and the deadline. The amount depends on roughly how much you want to spend on buying your first home. Setting a deadline gives you a date and helps you stick to your plan.
Make sure you set a budget you can stick to for your everyday expenses, which will help you save much quicker.
Setting a deadline helps you save your deposit
Say you’re a typical New Zealand couple each earning the average wage. You both decide to save 20% of your gross income. This means you’ll have a 20% deposit for a $500,000 home in around five years. That sounds do-able, doesn’t it?
You might also be able to use your KiwiSaver savings to help buy your first home. So squirrelling away any extra dollars into your KiwiSaver account will really speed up becoming a home-owner.
How KiwiSaver can help
When you’re buying your first home, you might be able to get a leg up from your KiwiSaver savings. There are two ways you could take advantage of your KiwiSaver savings to become a home-owner. These are:
- KiwiSaver first-home withdrawal
- KiwiSaver HomeStart grant.
If you qualify for these schemes, you can use both to help buy your first home – so your money goes a lot further!
You could use your KiwiSaver savings towards your first home or land to build your first home if you meet 2 conditions. These are that you have:
- been contributing to your KiwiSaver account for at least 3 years
- never owned land or property.
You can withdraw some or all your KiwiSaver savings, as long as you leave at least $1000 in your account. If you've transferred money from an Australian super scheme, you'll have to leave that in your KiwiSaver account too.
Paid into your KiwiSaver account for 3 years or more? Maybe you could use it for your first home
If you’ll be buying with someone who’s also a KiwiSaver member, each of you might be able to use the first-home withdrawal.
Even if you’ve owned a home before, you might be able to use your KiwiSaver savings to buy a home as a ’previous homeowner’. You need to contact Housing New Zealand to be approved as a previous homeowner buyer before you get in touch with your KiwiSaver scheme provider.
Apply for the first-home withdrawal by contacting your KiwiSaver scheme provider.
KiwiSaver HomeStart grant
If you’ve been contributing regularly to your KiwiSaver account for at least 3 years, you may also be able to get the KiwiSaver HomeStart grant.
The amount you get depends on:
- how long and how much you’ve been paying into your KiwiSaver account
- the kind of home you want to buy.
In other words, you must have made minimum contributions through your pay packet for 3 to 5 years.
And you get different grants for existing and brand-new homes, with a bigger amount for new-builds.
If you’re buying with someone who’s also a KiwiSaver member, each of you could receive a KiwiSaver HomeStart grant.
Although the grant is mainly for first-time buyers, you might be able to get it if you’ve owned a home before.
You need to meet other conditions to apply for the KiwiSaver HomeStart grant. These include caps on your income and the house price.
Housing New Zealand runs the KiwiSaver HomeStart grant. To apply for a grant, you must fulfil certain conditions so, if you think you might fit the bill, get in touch with Housing New Zealand.
When you take out a home loan, you usually must buy house insurance, which covers the building. You may also want to think about getting life insurance and/or mortgage insurance.
There are different kinds of life insurance. Term life insurance pays out a ‘lump sum’ if you die during the term of your mortgage.
Mortgage insurance covers your home loan if you need it. The two main types are:
- mortgage protection insurance – this pays the rest of your home loan if you die before you’ve repaid it.
- mortgage repayment insurance – this covers your monthly repayments if you can’t pay because you’re seriously ill, have an accident or lose your job.
You may be able to get mortgage protection insurance as part of your life insurance.
If you’re thinking about taking out some insurance, it pays to look around. Your mortgage lender may offer insurance so you can easily add the cost to your home loan, but it may have restrictions so see what deals are out there.
Other stuff to think about
There’s a lot to weigh up when you’re buying your first home. On the money side, there are one-off fees and charges plus some ongoing costs.
As well as the amount of your home loan and deposit, you’ll probably have to pay fees and charges to your mortgage lender. The good news is that some fees might be waived, which means you don’t have to pay them.
Even so, you’ll have to cover other fees and charges. There are legal fees, builder’s reports and maybe a Land Information Memorandum (LIM) to pay for while you’re making an offer on a place and then buying it.
Don't forget other costs when you buy your first home
When you’re moving into your new home, remember that you might have to pay moving costs, like van hire. You’ll probably need to cover the cost of connecting the power, phone and internet.
Once you’re a home-owner, you’ll probably want to protect what’s inside your home as well as the building itself. You’ll be able to get contents insurance to cover damage, loss and theft of your things.
As a home-owner you’ll have to pay rates to your local council to help pay for local services like parks, street lighting and sewerage.
And if you buy a flat or townhouse in a housing complex, you might have to put in towards the maintenance and insurance of shared areas. You’ll need to ask a lawyer to check what you need to pay and what it covers.
Buying your first home can be difficult and confusing, so maybe some professional advice would come in handy. Speak to a mortgage broker about home loans and to a lawyer about the legal side, called ‘conveyancing’.
Get off to the right start
Now you've got a few ideas about buying your first home.
Working out the mortgage you can afford is probably the hardest part. Paying back your home loan is something you should think about before you sign on the dotted line. First, figure out the best mortgage for you. Then keep on track to repay it by checking every once in a while that it still suits your needs.
Planning and money-smarts are the path to your very own front door
Once you've pinned down how much you need to borrow as a home loan, you know how much you need as a deposit. Then you can start saving for it.
If you have a KiwiSaver account, your KiwiSaver savings could go a long way towards buying your first home. If you've been contributing to your KiwiSaver account for at least 3 years, you might be able to make the most of one or both of the special schemes for first-time buyers.
Once you've sorted your home loan and deposit, you'll need to think about insurance and other costs of owning your home.
Buying your first home can feel difficult and complicated. But planning and being money-smart are the path to your very own front door.