By Jade Crawford, financial adviser at BetterSaver
Buying a home can be a daunting ordeal. Finding the right home is hard enough, and then there’s the whole mortgage process to navigate. Especially in our current competitive housing market, you want to be ready to purchase when you find the right property.
Don’t let the home loan process intimidate you. I’ve put together a step-by-step guide to walk you through it so you can be prepared and confident.
Step 1: Find out how much you can borrow
The general guideline is that a lender will provide 80% of the home’s value or price. Of course, this depends on your income and ability to make payments on the amount you borrow. Your lender will want to know about all of your current debts and income to gauge the payments you will be able to afford. Then they’ll give you an estimate of what they are prepared to lend you.
To get an idea of what you might be able to afford, use a home loan calculator to estimate what your payment amounts will be, how long it will take to repay your home loan, and how much you will end up paying in interest. (The calculator makes it easy to see how even a small increase in your payments can save you thousands of dollars - good motivation to make paying off your home loan a priority!)
Also, check what will happen to your mortgage payment when home loan rates fluctuate. Unless you have a fixed-rate mortgage, your payments are subject to change with shifts in interest rates. The home loan calculator allows you to select various interest rates so you can be sure you can still make the payments when rates change. And if you have no idea what home loan rates are like, you can check the current rates from various lenders here.
Step 2: Check your eligibility for First Home Loans
If you’re eligible for a First Home Loan, your deposit could be reduced to as little as 5%. Most lenders typically require 20% for a deposit, so getting a First Home Loan really reduces the amount you have to save up which means you can buy your first home that much faster.
The criteria for eligibility are explained on Kāinga Ora’s site. There are income caps, house price caps, and you must have 5% of the house price for the deposit. You have to be either a NZ citizen or permanent resident, or have a resident visa and ordinarily reside in NZ. Plus there are a few other criteria.
If you’re eligible, celebrate! Then get on to the next step.
Step 3: Apply for pre-approval
Pre-approval lets you know how much your lender is willing to loan you, so you know what price range you can look at. This is helpful because it means you don’t look at things out of your budget and get your heart set on an impossible dream home, and it also speeds up the loan application process once you’ve found your desired property. You can get pre-approval whether you are applying for a First Home Loan or a regular mortgage.
Step 4: Save up your deposit
This isn’t exactly ‘Step 4’ because hopefully you have been saving along the way already. But, now that you know how much you can afford to borrow and approximately how much you need for a deposit, you can set a concrete goal and timeline to reach it.
How do you save money for a deposit? This is my favourite part.
First, check your KiwiSaver account. You can withdraw your KiwiSaver fund for a deposit on a first home (there are a few criteria you must meet). When I say check your KiwiSaver account, it’s not just about what your balance is but how you can grow your fund to increase your balance. There are simple things you can do to maximise your KiwiSaver so you get the most money possible.
Choosing the right KiwiSaver fund can potentially mean the difference of thousands of dollars. The easiest way to find the right fund is to take BetterSaver’s Fund Finder quiz. It only takes five minutes. We have done all the research into the 180+ available KiwiSaver funds so you don’t have to. We’ll ask about your goals, timeline, lifestyle, and values to match you up with the best fund for you. It’s that simple.
While your KiwiSaver fund is working for you, work out a budget to save money. I recently read an article in the NZ Herald about a couple who saved over $30,000 in one year by cracking down on their spending. So impressive! Now, that might not be realistic for you. But it shows what serious dedication and commitment can amount to. Personally, I love to budget and save - it’s rewarding to watch my savings and investments grow. BetterSaver has lots of practical tips to help you save money and budgeting strategies for everyone. No excuse not to get started now!
Step 5: Start house hunting
Do some research into the current market. Arming yourself with knowledge is the best way to ensure you make a wise decision. You can use online tools like TradeMe and homes.co.nz to see what houses are going for in certain areas. You’ll also want to know what the estimated property value is and the rateable value, or government valuation.
Decide ahead of time what features are really important to you (location? A garage? Sunlight?) and what you would like but could compromise on. This will narrow down your search and guide you when you feel overwhelmed by choices.
Once you have decided on a house you would like, apply for final approval from your lender.
Owning a home is doable
Now you know what you need to do to get through the home loan process. I hope this gives you confidence that the goal of home ownership is attainable!
One more thing - if you go through these steps and find that your deposit and loan amount aren’t quite enough to buy your first home, you may want to look into First Home Partner. It is a program where Kāinga Ora contributes to the purchase of your home in exchange for owning a share of it, which you will buy back from them over time.
I like to remind people not to feel pressured to buy a home if you’re not sure it’s for you. Personally, I’m happy renting and putting my money into investments. It’s your choice. Either way, seek advice from a financial adviser and sort your KiwiSaver so that you make the best financial decisions.
Any questions? Send me a message. As BetterSaver’s financial adviser, I’m here to help.