On 22 May 2024, Kāinga Ora closed applications for the First Home Grant (formerly known as KiwiSaver HomeStart Grant).
Buying your first home can be very exciting and sometimes stressful, so if you’re looking to get on the property ladder it’s important to be equipped with the best advice before you get started. At Squirrel we have an awesome team of Advisers who are here to guide you through the home buying process.
Because we deal in first home buying on the daily, we know the process and the hurdles that come with it, inside out. So we thought we’d put together five top tips for first home buyers below.
First home buyer “must knows”
Before launching into mortgage pre-approvals, visits to the bank and house hunting, there are some must-knows for any first home buyer that you should be aware of.
Let’s start with the basics:
A home loan is likely to be the biggest financial commitment you’ll ever make
Yep, that’s right - having a mortgage is no walk in the park, especially when it’s your first one. It’s really important you borrow within your means; otherwise keeping up with mortgage repayments can make life difficult.
Most mortgages run for 30 year terms, but can be shorter or longer depending on the agreement you make with your lender. The amount borrowed will then be broken down into mortgage repayments, which include interest. This interest rate can be fixed, floating or a mix of both and there are various repayment structures you can choose from. Sorted.org.nz has a great article on the different types of mortgages and interest rates in New Zealand.
Get into a home with less than a 20% deposit
In order to take out a mortgage, you will need to have a deposit, which will become your equity in the home. So for example, if the cost of the home you want to buy is $800,000, a 20% deposit will be $160,000.
With a 20% deposit you can access all of the best rates and specials, so it’s a good number to aim for. But the reality is if you’re in a strong financial position, there are ways to borrow with less. In some cases, the bank may accept a low deposit home loan, in which case borrowers can get approved with a 10% deposit. Although, it’s likely you’ll face additional borrowing costs like low equity fees or additional margins on mortgage rates or lower discounts.
Another solution we often use for our clients is ‘the bank of mum and dad’, where your parents guarantee that portion of the 20% you don’t have. The bank will view it as a full 20% deposit which means you can access those sweet interest rates.
You may qualify for government help when buying your first home
There are various ways to fund your first home, including government schemes. The NZ government offers financial help for first home buyers to help you get your deposit together - the Welcome Home Loan, KiwiSaver HomeStart Grant and KiwiSaver first-home withdrawal.
- If you get a Welcome Home Loan, you only need a 10% deposit instead of the 20% that is required by some lenders and you will generally be able to borrow more.
- The KiwiSaver HomeStart Grant is available to KiwiSaver members who have regularly contributed to their KiwiSaver for a minimum of three years.
- If you’re buying an existing/older home, the HomeStart grant is $1,000 for every year you’ve contributed to KiwiSaver, up to a maximum of $5,000 for five years.
- For Kiwis who have bought off building plans or plan to build a new home, the HomeStart grant is $2,000 for every year you’ve contributed to KiwiSaver. This has a maximum of $10,000 for five years contributing. If this is what you plan on doing, we have a Squirrel HomeBuild loan which is the easiest way to finance building a new home.
- The KiwiSaver first-home withdrawal is available to members of KiwiSaver who have been contributing to the scheme for at least three years. You can withdraw as much of your KiwiSaver balance as needed, as long as at least $1,000 remains in your account.
It doesn’t stop at the deposit - there are other costs involved
We don’t need to keep telling you that buying a home is expensive - you already know that. But do bear in mind that the deposit and mortgage repayments aren’t the only things you’ll need to budget for.
Consider costs like lawyers’ fees, builders’ and LIM reports, moving costs and ongoing costs for insurances, rates or body corporate fees.
You may be able to get help from family or friends
If you have family or friends who would like to help you get into your first home, there are a few options worth looking into:
- You could combine resources so you and your family/friends band together to buy a home together. Bear in mind that banks have different calculations for multi-household applications, so it’s important to learn about these upfront before you make any decisions. You can learn more about joint ventures when buying a home on our blog.
- Someone could opt to gift you some or all of the money required for your bank deposit. (Lucky you).
- You can have guarantors on a loan., aka the bank of mum and dad as mentioned above.
In all cases, it’s always a good idea to seek legal advice for all parties involved in the above arrangements. We’re of course happy to chat through these ideas as well; we’ve seen it all.
Squirrel’s top tips for first home buyers
So, now that you’ve got some context, let us share with you our acorns of wisdom for anyone looking to buy their first home:
1. Your finances matter now
When you go through the process of getting pre-approval for a mortgage, you may find previous instances when you were a bit foolish or forgetful with your money come back to haunt you.
Your home loan won’t be fully approved until the bank has seen your bank statements - and they could look back months or even years. Dishonoured direct debits or unarranged overdrafts can make you look like a risky prospect and your loan request could be declined.
Acorn of wisdom: the best way to avoid this is to make a tight budget and be aware of when costs will be debited from your account - and don’t miss them! Whenever you get paid, make sure you have sufficient money in the account(s) that have direct debits coming out of them so you avoid dishonoured payments or unarranged overdrafts. Sometimes it can be helpful having multiple accounts so you can have money for a cost, like a car loan, in it’s own account and easily track when that’s debited. If you need a hand getting payments under control, a debt consolidation loan will bundle them all into just one payment to keep track of.
2. Ditch those other debts
Other personal loans can impact your equity position, which may affect how much you’re eligible to borrow. For instance, if you have a car loan worth $15,000, that will be deducted from your total equity, and therefore borrowing potential.
Credit cards can seem really appealing and most providers offer incentives such as reward points or 0% interest on purchases to reel you in. It’s important to remember that the higher your limit, the less you will be able to borrow, regardless of whether your card has a $0 balance or not. A card with a limit of $5,000 could reduce your borrowing potential by around $20,000 or more!
Acorn of wisdom: Getting rid of your credit card completely is easier said than done. They can be useful for unexpected costs that pop up, especially when you don’t have savings to cover them. Simply reducing the limit on your credit card is a great start. Set a tight but realistic budget to pay off your personal loans as quickly as possible, too. You can read more on getting your debts under control on our blog.
3. Show the bank proof that you can afford a mortgage
Banks want to lend as much as possible to you, but they need to see evidence that you can afford to keep up with your payments, so you need to show them the money - or in other words, prove that you can afford what you’re saying you can.
So, you’re living at home paying $110 board per week to Mum and Dad? That’s great, but most banks will want to see some evidence that you can afford that new mortgage repayment of $600 per week. Demonstrating that you can save an extra $500 per week (or more) on top of your board will give the bank some comfort that they won’t be putting you into financial hardship should you take on that $500,000 loan.
Acorn of wisdom: Start collecting evidence of what your current rent costs are and if that isn’t equivalent or close to what your mortgage repayments will be, show savings going into a different account on top of that. The bank statements will tell all, so make sure they’ll tell the right story to the bank.
4. Work out how much you can borrow
It’s really important to borrow within your means, so work out how much you can afford to borrow and stick to it. While getting into your first home is really important, you still want to be able to afford to live without being reduced to two-minute noodles for dinner. Budgeting for everyday costs like food, insurance, education and entertainment is all part of the home buying journey.
Acorn of wisdom: You can use our mortgage calculator to find out how much you can afford to borrow for your home loan. Once you’ve got a good idea of what’s affordable for you, make a plan for how you would manage the mortgage repayments. Consider if there are other costs you could cut down on - if you bring your lunch to work and stop buying barista-made coffee, that could be an extra $50-$100 per week to put on your loan. Read up on more of our tips on how to get mortgage-free faster.
5. Weigh up your needs and wants
When you’re deciding where to live, needs vs. wants can become a bit blurry, but it’s important to determine the difference when buying any home - not just your first.
Having this clear in your mind could have an impact on the amount of money you end up needing to borrow. If you want a home with a brand new kitchen because you just prefer the look of it, you will likely pay more for it. Whereas if you need to be in-zone for a certain school, or you need some outdoor space for pets, those could be non-negotiables that you’re willing to pay more for.
Acorn of wisdom: Getting your foot on the property ladder can be tough, so do yourself a favour and make a list of your non-negotiables. Why not make a separate list of improvements you could make to the house in the future to tick off some of those wants, too? You could plan to save for a kitchen renovation, or to do some landscaping yourself - all of it is possible if you borrow within your means and stick to a budget.
Hopefully this has cleared up some of your questions and motivated you to get your finances in order for your first home! If you have any questions or are looking to get into your first home, we’re here to help. Just get in touch with the team and we’ll be happy to chat and get the ball rolling!
Our First Home Buyer’s Guide has all the tips and tricks you need.