Your Homeownership Adventure Begins Here

Becoming a homeowner is a significant milestone in many people's lives, often representing a dream realised after years of hard work and financial planning. However, the path to homeownership can seem daunting, especially for first-time buyers. To guide you along your homeownership journey, we will help to demystify some common misconceptions about the real estate market and building a deposit, explore the key factors banks consider when granting a mortgage, and provide valuable tips to keep at the front of your mind as you save.

Demystifying the Market and Building a Deposit

What You Can and Can't Spend Money On

One common misconception is that you need to live in constant fear of spending money to secure a mortgage approval. While it's important to be mindful of your finances, you don't have to deprive yourself of every luxury. Instead, focus on intentional savings and responsible financial management. This includes managing expenses efficiently, ensuring you don't miss payments, and staying on top of bills and any outstanding debts. Well-organised accounts, such as automatic payments and transfers, demonstrate good financial character, which banks value.

"It's Impossible for Young People to Buy Right Now"

The idea that homeownership is out of reach for young people is another misconception. While it's true that the real estate market can be competitive, waiting for the perfect time might not be the best strategy. Often, the best time to buy is when you are ready. Many aspiring homeowners are closer to their goal than they realise. Speaking with a financial adviser to assess your financial situation and run the numbers can reveal opportunities to enter the market sooner than you think. 

The Two Key Factors Banks Look For: Income and Deposit

Using Your KiwiSaver and Building Up a Deposit

A substantial deposit is one of the keys to securing a mortgage. The amount you need varies, but generally, it's advisable to aim for 20% of the property's purchase price. However, there are options for first-time buyers, such as the First Home Loan, which allows for a 5% deposit.

In most cases, the most useful tool to build up your deposit at this point will be your KiwiSaver. Ensuring that you are in the correct fund is crucial to maintaining certainty around your balance when it comes time to withdraw. Higher-risk funds such as a growth fund, you can expect your return to fluctuate more than it would if you were to switch to a conservative fund.

It is also important to ensure that you take advantage of benefits that you might be eligible for, such as the First Home Grant. This gives first home buyers an additional $5k per person for an existing home and $10k per person for a new build, given that you meet the eligibility requirements and the house price does not exceed the regional price cap.

Naturally, the more significant your deposit, the better, as this means borrowing less and qualifying for lower interest rates.

Income/Servicing Requirements

Banks closely evaluate your income to ensure its reliability. A solid track record of earnings, including a good tenure in your current role or industry, can positively influence your application. Keep in mind that banks have different criteria for assessing different types of income. For instance, salary and wage earners are assessed differently from those who are self-employed, who typically need two years of financials.

Additionally, it's crucial to keep short-term and high-interest debts to a minimum. While recent regulations have been more lenient, maintaining good spending and savings habits is essential. Banks now consider common-sense spending patterns and focus on the overall ability to save rather than scrutinising every minor expense.

Understanding the Numbers

Fixed vs. Floating Interest Rates

When choosing a mortgage, you'll need to decide between fixed and floating interest rates. Floating rates tend to be higher but offer more flexibility for lump-sum payments and additional contributions. Fixed rates, on the other hand, provide stability but may come with restrictions on extra payments.

Other Costs of Homeownership

Aside from your mortgage, several other costs come with homeownership, including legal fees, registered valuations, council rates, and house insurance. It's essential to budget for these expenses to avoid any surprises during the buying process.

Tips for Starting Your Homeownership Journey

As you begin your homeownership adventure, here are some valuable tips to keep in mind:

• Consult with an Adviser: If you haven't already, speak to a financial adviser to assess your readiness for homeownership.
• Set a Savings Goal: Establish a clear savings goal and take practical steps to achieve it. Consider setting up automatic transfers to ensure consistent savings.
• Optimise Your KiwiSaver: Speak to a KiwiSaver adviser to ensure your KiwiSaver account is set up in the most suitable way for your financial situation.
• Increase Your Income: Explore opportunities to boost your income. Remember that banks consider both income and deposit when evaluating your mortgage application.
• Maintain Good Financial Habits: Continue to practice responsible financial management, as this will strengthen your application.

Seeking guidance from a financial adviser is a critical step in your homeownership journey. An adviser possesses the knowledge to help structure your mortgage in alignment with your financial goals. They can evaluate your readiness for homeownership, recommend the right mortgage type, and advise on repayment strategies. Moreover, they can help you optimise benefits from programs like KiwiSaver and First Home Grants, potentially reducing the financial burden of your first home purchase.

The path to homeownership may seem complex, but with the right knowledge and guidance, it's an achievable goal. By understanding the factors banks consider, making informed decisions about deposits and interest rates, and planning for additional costs, you can embark on your homeownership adventure with confidence. Remember, your journey to owning a home begins with taking the first steps towards financial stability and preparedness.

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Article by Ian Chan

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.