Milestone has produced this house buyers’ guide to assist our clients in purchasing their first home. It is full of helpful tips and advice and is general in nature. We recommend you work with the team at Milestone to assess your mortgage lending capacity and to source the most appropriate loan for your situation. We recommend you undertake detailed due diligence on your house purchase and employ the right team of professionals to maximise the house buying potential and minimise the risk of making an incorrect purchase.
Executive Summary: The quick read
1. Buying a house makes much more economic sense than renting. However, you need to ensure you do not over commit yourself. We recommend saving a 20% deposit if possible.
2. House ownership does come with potential risks such as (but not limited to) falling house values, rising mortgage rates and an inability to meet mortgage payments. You can lose money, so it is important to seek professional advice and not just listen to the sales people.
3. “Never lie on your mortgage application - not even a little”. Lying on a home loan application is considered mortgage fraud and there are substantial penalties you may face if you decide to falsify any information.
4. There are many benefits of using a mortgage adviser. At Milestone, we work for you and not the lender.
5. KiwiSaver is designed to help you save for your retirement. However, it includes important features for first home buyers.
6. Going into a house purchase with friends or partners is a valid option assuming you have a good relationship with them.
Combining the assets and incomes of several people will make it easier to meet the bank lending criteria and enable you to get on the property ladder sooner.
7. Friends and family most of the time are always happy to help. However, understanding the benefits and risks of getting help from them is crucial before you proceed with your loan application.
8. Buying new or existing home? There has always been a lot of debate about which is the best type of property to buy. Just like everything else, there are pros and cons for both.
9. Stop procrastinating. If you can buy now, don’t wait. There are reasons why we say this.
10. Renting with a lease option can be appealing to buyers who might not otherwise be able to afford a home, but the fact that the majority of renters end up declining lease options indicates some drawbacks with the system.
11. "Can’t we do this on our own? Do we need to use a Real Estate Agent?" The answer is yes; you can do it on your own. You can search for homes, arrange showings, and even negotiate on your own. The real question may be "do we want to do it on our own?".
Buy vs. Rent
1) Invest in yourself
When you own a home and pay a mortgage, you’re paying yourself instead of a landlord. By paying off the mortgage, you are building your equity. Paying a mortgage is a form of compulsory saving.
2) You are in control
When you own a home, you can remodel or add more space whenever you like (subject to council rules). If you are living in a rented apartment or house, your lease probably has restrictions on what you can put on the walls, how you can cover windows or even how many people can live there. If you don’t like these restrictions, you are free to give 30 days’ notice and then move. However, when you hold the keys and the mortgage, you can do anything you want, depending on the council rules and how much room you have to work with.
3) Increase your equity
When you own a home and house prices rise, you earn equity with every year that passes. What is equity? Equity is the difference between the current market value of the house and the amount of the mortgage that is still owing. Let’s look at an example:
You purchase a house costing $500,000, and you put down a deposit of $100,000. You now have $100,000 of equity in that house. Over the years, you grow your equity through a mixture of the house increasing in value (either via natural market increases or via improvements you do) plus you are paying off the outstanding mortgage. After ten years, you have reduced your starting mortgage from $400,000 to $360,000, and the house has increased in value to $600,000. Your equity has now grown from the original $100,000 to $240,000. This is a 140% increase in your investment. Buying a home in areas which historically increase in value lessens the risk and increases the likelihood of growing your equity.
4) Pass it on
Owning your home has a distinct advantage over renting as you will have something to leave the children. After years spent paying off the mortgage, it’s reassuring to know that your property can stay in the family when your kids take over your assets. What you choose to do with your home is fine, but it will always be your legacy. Everyone should have a Will and an Enduring Power of Attorney (EPA). If you’ve been putting off doing this, don’t delay, or your legacy may not go to your loved ones when you die. Perpetual Guardian does a great job in helping you set up your Trusts, Wills and EPAs.
5) You can access your KiwiSaver plus potentially obtain a HomeStart grant
Please see “How do you use KiwiSaver Schemes and HomeStart Grant for your first home?”
6) The power of leverage
How does investing a lump sum of $100,000 into a “buy and hold” property investment compare to investing in a diversified portfolio?
If you invest $100,000 for 20 years in a mixture of investments and get a 5% average return then your $100,000 will increase in value to $271,264 at the end of 20 years.
If you purchase a property investment for $500,000 and put in a 20% deposit of $100,000, your investment can increase to $1,356,320 at the end of 20 years. This assumes an average 5% growth rate per year. The significant difference in returns on the property is that you receive a gain on the value of the WHOLE value of the asset, not just what you put into it.
*Note: This scenario is intended as a simple example. It does not consider tax, costs of holding a property or renting, etc.
House ownership and its potential risks
Home ownership in New Zealand is regarded as a sound financial decision. When you buy a home, you are supposed to be making an investment for your future and your financial position. While in many cases, it is a good idea, there are some financial risks associated with home ownership.
To form a complete picture, you, the prospective buyer, need to consider the potential risks and disadvantages of home ownership. Understanding these problems beforehand will give you a better chance of minimising their impact and avoiding the fate suffered by some homeowners.
The most common risks to consider before you go out and buy a house include:
Risk of default
The biggest risk associated with home ownership is the potential for default. Buying a home is an enormous financial obligation. When you fail to make the payments, the bank will take back the house and your credit will be affected drastically.
Paying off a home can take 30 years or more, your financial situation could change- making it difficult to meet mortgage repayments. Consider how you would pay the mortgage if any one or more of the following occurred:
- Interest rates rose to their historical average of 7.2%;
- you or your spouse could lose your job;
- you could incur huge medical bills;
- additional income from overtime or bonus payments could cease;
- lending criteria changes and the banks want you to increase the equity in your house;
- the current tax benefits of home ownership changes;
- the cost of home ownership (e.g., rates, insurance, maintenance) may increase but your income remains the same;
- Your home is assessed to be a leaky home and the cost to repair it is way beyond your ability to pay.
Property values can depreciate
You can lose value in your home for a number of reasons, such as a recession, the condition of your home not being kept up, you may discover that your home is a ‘leaky home’ or a “P contaminated” home or there is a drop in a neighbourhood’s home values. If your home loses value and you have to sell it for less than you owe, you will be required to repay the amount of the outstanding mortgage.
Loan applications MUST be truthful
Applying for a home mortgage is an incredibly exciting but also intimidating time. It is vital you avoid the common mistakes some individuals make that will impede your ability to qualify for a loan. Purchasing a home requires patience, money, paperwork and of course requires a great deal of understanding. If you want to invest in real estate, it is important to educate yourself properly and know what mishaps to avoid during the application process.
“Never LIE - not even a little.”
Buying a home is often a major stretch of the finances, and it is tempting to falsify some facts when applying for a mortgage. However, lying on a home loan application is considered mortgage fraud and there are substantial penalties you may face if you falsify any information:
• Overstating your income so you qualify for a larger loan may be tempting. However, it's important to remember all bank statements, tax returns, payslips, etc. are required when you apply for a mortgage. The lender may find out and decline your loan application.
• Some borrowers falsify how they have accumulated the deposit. They may tell the lender that they have saved this money themselves, when in fact, they have borrowed it from their parents or a friend. Any money that is given to you or borrowed by you is technically a debt (even if it is interest-free and the person has no intention of asking for it back). The only way to truthfully say the money is yours is either if you have saved it, or someone has technically ‘gifted’ the money to you.
• Accessing your KiwiSaver and obtaining a HomeStart Grant is for your first home and not for the purchase of a rental property. Penalties can be incurred if you state you are going to live in the house but you rent it out within the first six months of purchase.
• Ensure you are completely honest about all aspects of the loan application.
We are Authorised Financial Advisers
The benefits of using a mortgage adviser and specifically why it is best to use Milestone
All our mortgage advisers are Authorised Financial Advisers and are qualified to give you mortgage advice; you may not get that kind of professionalism if you ring up a lender's call centre. We also have a higher duty of care towards you than a Registered Financial Adviser (RFA), or some other mortgage sales person.
We give you professional, unbiased advice on your financial options
We know the industry; we are specialists providing expert advice and guidance on mortgage products, interest rates and current housing market conditions. You get unbiased advice and we can make objective recommendations on financing solutions through a variety of lenders. We closely support you throughout the entire application and settlement process including keeping you up to date with the progress of your application.
Save time with convenient one-stop-shopping
Mortgage advisers do the research and shopping for you so there’s no need for you to waste time organising appointments with competing mortgage lenders when you could be house-hunting!
Negotiating on your behalf
Negotiating can be stressful. Mortgage advisers act in your best interest and do all the negotiating to secure competitive rates and terms that make sense for you.
As mortgage advisers, we are not restricted to any one bank or range of products. With a network of major lenders and products to choose from, mortgage advisers can source your ideal mortgage options from banks, credit unions, non-traditional lenders and more.
Assurance that you’re getting the best rates and terms
Mortgage advisers have the negotiating power because lenders compete for their business. To you, that means the best rates and terms for your individual needs.
Fast and efficient
From the initial assessment of your unique situation right through the closing process, transactions move quickly when working with a mortgage adviser.
No cost to you
Mortgage advisers are paid by lending institutions which in the vast majority of cases means there’s no cost to you and no surprises.
Even after your successful mortgage transaction, mortgage advisers are a great resource for advice, queries or future referral needs.
How do you use KiwiSaver Schemes and HomeStart Grant for your first home?
KiwiSaver is designed to help you save for your retirement plus it also includes features for first home buyers. If you are a KiwiSaver Scheme member, you may be able to apply for a first home withdrawal from your KiwiSaver Scheme. As well as the KiwiSaver Scheme withdrawal, you may be eligible to receive a KiwiSaver HomeStart grant from Housing New Zealand:
1. Find a first home that is affordable and within the KiwiSaver HomeStart Grant limits.
2. Check that you qualify to make a withdrawal from your KiwiSaver Scheme and that you are eligible for the KiwiSaver HomeStart Grant.
3. Work out how much you can withdraw from your KiwiSaver Scheme, and home much you can potentially receive from the KiwiSaver HomeStart Grant.
4. Apply to make a first home purchase withdrawal.
5. Put the money towards your first home purchase.
If you qualify, you may be able to withdraw the total amount in your KiwiSaver account less $1,000 and any amount transferred from an Australian complying superannuation fund. The funds must be put towards your first home. You need to apply early as the money you withdraw must be paid directly to your New Zealand solicitor (or licensed conveyancer) before settlement.
Making a first-home withdrawal
You must have been a KiwiSaver Scheme member for three or more years. You can only withdraw money to purchase your first home - not an investment property.
If you have owned a home before, in some circumstances you may still be eligible to withdraw your savings. Your scheme provider may require you to contact Housing New Zealand to determine if you're in the same financial position as a first home buyer.
What can be withdrawn?
A balance of $1000 must remain in your KiwiSaver Scheme, but you can withdraw:
• Your member contributions.
• Employer contributions (voluntary and compulsory).
• Returns on investment(s).
• Member tax credits.
After three years of contributing to your KiwiSaver Scheme, you may be entitled to a KiwiSaver HomeStart grant. These grants are administered by Housing New Zealand and will be paid to your solicitor. The amount of the grant depends on whether the home is existing or newly built.
You could get:
• $1,000 a year for each year you’ve been a KiwiSaver member, up to a maximum of $5,000, if your first home will be an existing home, or
• $2,000 a year for each year you’ve been a KiwiSaver member, up to a maximum of $10,000, if your first home will be newly built.
The Government pays this directly to your solicitor on settlement day – it does not come out of your KiwiSaver account. Some criteria apply, including limits on your income and the value of the house you intend to buy. See the Housing New Zealand website at www.kiwisaver-homestart.co.nz
How Tom and Sally bought a house with KiwiSaver
Tom and Sally earned a combined income of $115,000 in the last year and had put in an offer on an existing home in Auckland for $420,000. As they have been paying rent in Auckland, they have only managed to save $48,000 deposit.
Their main bank has advised it will only lend them $336,000.
Tom has been a member of KiwiSaver since July 2007, when it was first launched, and has contributed the minimum percentage of his salary/wages each year. Sally, has been a KiwiSaver member since August 2008.
Both Tom and Sally submitted applications to Housing New Zealand for the HomeStart Grant and have been approved for $5,000 each. They have also made applications to their KiwiSaver Scheme providers to withdraw their contributions to help with their first home. They can withdraw a combined total of $26,000 from their KiwiSaver accounts.
House Purchase Price: $ 420,000
Minimum Deposit required by lender: $ 84,000
Saved Deposit $ 48,000
KiwiSaver HomeStart grant $ 10,000
KiwiSaver first-home withdrawal $ 26,000
Bank Loan: $ 336,000 ( 80% LVR)
Going into a house purchase with friends or partners – Is it a good idea?
While it’s common for friends to rent a place together after high school or college, it’s often a short-term arrangement until someone gets married or can afford his or her own place. However, if you don’t foresee marriage in your near future and your present roommate situation works, you might consider buying a house with a friend.
While some people would never enter into a mortgage agreement with someone other than a spouse, buying with a friend can be a smart investment – as long as you know the risks.
These are some of the significant financial benefits:
Easier home loan qualification
Anyone who has purchased a home in recent years knows that it is exceptionally difficult to qualify for a mortgage on their own. Lenders have tightened their standards with regards to credit scores, existing debt and down payments. If you apply for a standard home loan, the lender will require a minimum deposit of 20%. Considering the recent property market in New Zealand, with an average house value of $577,829 you are looking at a down payment of just over $115,000. This is a large lump sum for one person to raise. Let’s not talk about Auckland with an average value of $955,793. But with two people signing the mortgage application, the odds of approval increase. If you decide to buy a house with a friend, the mortgage lenders approval will be based on your combined income and the average of both credit scores. This increases your financing opportunities, especially with two people splitting the down payments and other costs.
Shared monthly expenses
As a property owner, it’s your responsibility to pay for utilities, maintenance, and repairs, in addition to the mortgage payment. The extra expenses that come with home ownership can scare some people. However, friends who purchase together share this financial burden.
Home equity gains
The longer you and your friend own the property and make mortgage payments, the more equity you will gain (assuming house prices rise). Equity is the difference between your home’s value and what you owe the lender. You and your friend may one day go your separate ways, but unlike renting, home ownership potentially lets you walk away with cash in your pocket. The two of you can split proceeds from the sale and put the money toward a down payment on your own properties.
Despite certain advantages, there are some risks that can arise if you buy a house with a friend:
In a perfect world, you and the other owner will always get along – but, of course, disagreements are bound to occur. Unfortunately, some joint owners are unable to work out their differences. It’s not so easy to walk away when you own a house together.
Both of your names appear on the mortgage, and therefore, you’re both responsible for the home loan. If one owner becomes upset or decides to move on, you have to either sell the house, or refinance in one owner’s name. Neither option is simple – it can take several months to sell a house, and if you can’t qualify for the mortgage on your own, a lender will not refinance, and the other owner’s name will be stuck with the mortgage.
Potential credit score damage
You might be responsible and pay your half of the mortgage payment and utilities each month. Unfortunately, your co-owner might not be. A job loss or huge medical bill can strike anyone at any time. If one of you can’t pay their share of the mortgage, it could affect both of your credit ratings; the bank will report you both to credit agencies for non-payment.
Difficulty qualifying for other loans
A big loan on your credit report may limit your availability to be eligible for other loans, such as a vehicle loan. In seeing whether you are eligible, the lending institution will look at the amount of debt you’re responsible for paying monthly relative to your income. Since you’re responsible for the entire mortgage payment (your friend is also), your debt to income ratio may increase such that you don’t qualify.
Overall, buying a house with a friend can work well and be beneficial for all involved. However, don’t rush the decision. Do your homework and check that each other can service the loan. Hire a lawyer to set a cohabitation agreement which outlines important details, such as the type of ownership, e.g., Joint or tenants in common and how you’ll pay for ongoing expenses, such as repairs and insurance. Plus, it’s a good idea to take out a term life insurance policy on each other – enough to cover the mortgage if one owner dies.
This is how Jess and Casey did it:
The pair paid $515,000 for their two-storey, four-bedroom house in the Western Hills, and moved into the home in December. For that price, they also acquired a large 900 square metre section, garaging for three cars and fabulous views across Stokes Valley. Read more…
Getting family or relatives to loan, guarantee or gift
With the Reserve Bank changes in late 2013 forcing most borrowers to have over 20% deposit, there has been a much higher incidence of family assisting home buyers with funds towards their deposit for a home. There are a number of ways that this can be done, and all have pros and cons.
Loan for deposit
This is a common way for parents to assist their children into a property. Parents could choose to lend you the money and have you pay back regular repayments or simply have you pay the money back when the house is sold or when you are in a better financial position.
If parents need to borrow the money for this, they should do so using a Revolving Credit account alongside their existing home loan. You can then make payments directly to this account, and the interest is charged only to that account. That way it is just like repaying your loan but it is in your parents’ name.
• Easy and negotiable management of repayments.
• The risk to parents is limited only to the amount they are lending you.
• Parents could be at risk of the borrower not repaying the loan or getting into financial difficulty.
• A minor inconvenience for parents if they have to complete a loan application for deposit.
Gift for deposit
This is a great option if you have access to it. The pros are obvious; free money, you're going to get a head start on your home loan and the Milestone Direct mortgage advisers will be able to secure you a great deal. The cons: you are excited to own a home and parents are more than happy to help you, BUT can you afford the mortgage repayments and expenses? Contact Milestone Direct now and get unbiased advice!
This is the most common option in recent years. It involves parents simply guaranteeing your home loan by providing the bank you are borrowing from, with a mortgage over their property and an assurance they will honour the obligations of any loan contracts should you fail to meet them.
• Simplicity - often very little paperwork involved.
• No cash changes hands between family members.
• Parents don’t get into more debt.
• The biggest risk is that you fall behind in mortgage payments and your parents then have to make those payments or face the danger of the bank requiring a mortgagee sale of their home.
• It restricts your parents’ ability for further borrowings.
• If you use the same bank as your parents, it may lead to you not receiving the best deal.
• Sometimes complicated to unwind once you have sufficient equity to standalone.
Westpac - ‘Springboard Home Loan’ (new) Read more…
Buying New vs. Existing Homes
There has always been a lot of debate about which is the best type of property to buy. Is it better to build or to buy an existing home? It all depends on your financial position and what your goals are; just like everything else. Of course, there are pros and cons for both, so let’s have a look.
Buying or building new
• Everything is new and modern.
• Good insulation, more energy efficient and more environmentally friendly.
• You can have input on the final product.
• New warranties and guarantees.
• Maintenance costs are minimal in the first few years.
• Latest wiring and plumbing to meet current standards.
• Up to date with the building code.
• Attract higher quality tenants.
• Extra cash flow in the first few years if rented.
• Good capital growth in the right areas.
• The cost is higher.
• New subdivisions tend to be further from town; schools and services not always in place.
• Built on smaller sections.
• More likely to have negative cash flow than existing homes.
• Possibly cheaper.
• Higher cash flow.
• More central location.
• Tend to have more character and custom design.
• Sometimes can be built better than a new home.
• Old houses often have more land.
• Can be hard to find in the current market.
• Might have major problems that you don’t initially notice.
• Sometimes, could be more expensive because of unique characteristics.
• More competition to get your offer accepted.
Why buy now and not later?
Everyone has their particular set of factors that motivate them to jump into the housing market.
For those potential buyers still sitting on the fence about whether to buy now or later, here are some points to help you make a decision:
1. New Zealand mortgage interest rates are currently very low by historical standards. If interest rates increase, then it will be harder to obtain a loan as many applicants will not meet the income criteria.
2. KiwiSaver and HomeStart Grant could contribute towards your down payment. You never know when they might change the rules.
3. Home values are increasing.
4. Rents are increasing with rising house prices and a shortage of rental properties in many locations.
5. Lenders are starting to tighten their lending criteria. Obtaining a mortgage with less than 20% equity might not be an option in the future.
6. In a rising market, borrowing money for a house gives you an exponential gain on a small deposit.
The dangers of being over leveraged
Leverage in property investment is when you use borrowed money instead of your own to purchase a property. You put down a deposit or use the equity in your home and borrow the rest. If you didn’t leverage your deposit to borrow, you would have to save the entire cost of the property.
Using leverage can magnify the potential gain from an investment, but there is always a risk. The cost of interest is never free, even at the current low rates. These costs must be factored in when thinking about using leverage. If you cannot repay the debt you take on, you may encounter the problem of defaulting on the loan and negatively affecting your credit score. Leverage is a property investor’s best friend, but it comes with a strong warning label!
Rent to own arrangements
Renting a home on a rent-to-own plan, also known as a purchase option or a lease option, means that the renter can choose to purchase the home for a predetermined price at the end of the lease, or simply move out. Renting with a lease option can be appealing to buyers who might not otherwise be able to afford a home, but the fact that the majority of renters end up declining lease options indicates some drawbacks with the system.
• Easy to qualify
The ability to easily qualify for rent to own homes offers one of the biggest advantages to homebuyers. When going with the lease option, the seller dictates the guidelines, making it easier for homebuyers to qualify. In most cases, the primary factors may include monthly lease payment, paying the option fee and a look at previous rental history.
• Immediately occupy the home
Homebuyers may occupy the home immediately after paying the lease payment and option fee. When going with traditional financing, it can take weeks or months to complete the process and settle. Instead of dealing with inspections, home appraisals and gathering various documents, the lease option process is more upfront and makes it easy and fast to move right into the home.
• Time to improve credit
Choosing rent to own homes allows homebuyers time to improve their credit before attempting to acquire a home mortgage. With this home buying option, buyers can work on their credit while living in the home. Before signing a contract, consider the amount of time needed to improve credit and then choose a lease period that will coincide with that time. If the seller is providing the financing for the home, then credit will be even less of a problem. This is a valid option for those with less than a perfect credit rating.
• Save for the deposit
Many potential homebuyers find it difficult to save the deposit which can be 20% or sometimes more. Rent to own homes allows buyers to save for the deposit over time.
Many lease option contracts allow buyers to save with a Monthly Rental Credit. Then when buyers are ready to purchase the home, owners discount the home by the amount paid into the Monthly Rental Credit. This is like saving for your home deposit.
• May pay higher sales price
In many cases, vendors set the sale price higher for rent to own buyers. Vendors may sell at a lower price to cash buyers, but they will often try to get a higher price if going the rent to own route since they have to wait longer to sell the property. Of course, the price of the home is negotiable.
• Potential of lease cancellation
Homebuyers must consider the potential risk of lease cancellation when considering rent to own homes. Late payments may cause the seller to cancel the contract. If the lease is cancelled, for this reason, homebuyers may lose the option fee they prepaid.
• Rents may be higher than normal
In some cases, rent paid during the lease period may be higher than average rent amounts in the area. This may turn into a problem if the buyer decides not to follow through on the option to buy since the buyer will have spent far more on rent than would have been spent in other rental situations. However, while the rent may be higher, part of that money usually is put towards the price of purchasing the home, which means it will pay off when the purchase is completed.
• Potential title encumbrances
Homebuyers must be aware of potential title encumbrances when choosing the lease option. If the property has any encumbrances against it, this can cause a substantial problem when buyers are ready to make the final purchase. To avoid this issue, having an attorney or title company verify that the title is free of any encumbrances is important.
Should we buy on our own or use an agent?
When buyers first begin looking for a home, they may ask "can't we do this on our own? Do we need to use a Real Estate Agent?" The answer is yes; you can do it on your own. No law prevents you, as an individual, from buying property without professional Real Estate assistance. You can search for homes, arrange showings, and even negotiate on your own. The real question may be "do we want to do it on our own?".
On your own
• You can try and find a “for sale by Owner’ who is willing to sell at a reduced price as they have no real estate agent fees.
• You are completely in control of the pace of the process.
• For better or worse, you are your own representative.
• You can do your research, market comparisons, find inspectors, etc.
With an agent
• A much wider choice of properties as most homes are listed with Real Estate agencies.
• If represented by a Buyer’s Agent, then a Comparative Market Analysis is typically available. This enables you to see how the price of the house compares with the current market.
• An agent has experience in negotiations.
• Can offer choices and suggestions in home inspectors and other agents.