K. But where to start…..?

Should you look into a Welcome Home Loan?

This is a decent scheme that allows you to buy with a very small deposit, maybe even no deposit within certain limits. My feeling for most people who want to buy a house in Auckland is that the scheme is of little use because property prices are a bit too high. If you’re an Auckland buyer and you fit the scheme criteria there’s a damn good chance you fit the standard 95% bank criteria too. So what’s the point. In other cities and towns maybe…

Get a deposit

Whether you fit the 100% loan criteria via Welcome Home Loans or not my advice would still be to see if you can save a deposit anyway, especially if you are in no hurry to buy. Having some kind of deposit makes your mortgage balance and loan repayments easier to swallow. Sure, the difference is small but for some people that difference is enough to make things work. And if you’ve been saving hard out you’ll be used to the kind of commitment paying a mortgage requires. Saving a deposit is good practice for paying a mortgage.

So, how much deposit?

The standard response is to get a 5% deposit, maybe more if you can. Ok. That sounds fine. But just how much is a 5% deposit? How much do I need to aim for. $20,000. $30,000. $50,000. Or what? Good question.

The answer really lies in knowing how much loan your income will buy. For instance some people’s income may let them borrow $1M of which 5% is $50,000. Clearly you don’t have to go out and buy a million dollar home straight away because although you might be able to afford it that size loan might just kill you! Other people’s income might allow a more modest loan of $200,000 in which case 5% is $10,000. But you don’t get much for that in Auckland, maybe half a cardboard box.

So how do you figure out what you can borrow and in turn what the 5% deposit will be?

Gross income x 4.5 is a rough rule of thumb. Or you could add up your rent plus savings and go to a bank calculator to see how much loan you could get for that level of monthly or fortnightly repayment. Still, both are only guestimates.

But most people really want an accurate figure so they’ve got a specific target. Knowing this will also help you figure out what kind of house you can realistically look at once your deposit is in place. So, speak to someone who does this kind of calculation every day. Like us.

For most people the minimum deposit target for a house is…?

In our experience it’s around $20,000 as most of our clients are first home buyers looking in Waitakere, North Shore or Hibiscus Coast where your typical first home is in the $350,000 to $450,000 price range.

Then what?

Once you know the target figure you can then set up your budget to make it happen. You’ll know how many pay days it’ll take and the funny thing is that family are often willing to help build your deposit as well especially if they can see you’ve got a little bit serious by talking to a broker and doing a budget. Doing these two things helps eliminate the fear they have that you’ll blow the money they give you on a trip to the Melbourne Cup or whatever.

Kiwisaver plays a part

Yes it does. And for a lot of people Kiwisaver is becoming ‘the’ way to save for a house as well as retirement. There’s a lot to like about the scheme as it applies to first home buyers mainly because you can withdraw the money you put in as well as the money your employer puts into the scheme. In other words your employer is helping you save for a house! Free money! Yeeehaaa! Don’t forget the first home buyer subsidy as well which adds at least $3000 per person. And couples can double up if both of you use your Kiwisaver benefits.

Geez, I wish Kiwisaver was around when I bought my first house! Still it was pretty straightforward, we just did a budget and slotted money into a savings account each payday. It took us 6 months to get to our target figure and we were in a house 6 months later. It was a piece of cake in the end.

That’s despite the doom and gloom that keeps coming out of Europe. The ongoing quakes in the garden city. And the downbeat articles that grab headlines and sell newspapers. In October 2011 I followed the lead of my new mortgage clients and bought a house after sitting on the sidelines for a couple of years as a renter myself. The conditions seemed good enough then and I can’t see 2012 being much different.

Below are the main reasons I took the plunge recently – some of them are economic, some of them are entirely personal.

Reason 1 – sick of renting, deposit in hand

Although not a first home buyer I was in pretty much the same position. That is, I had a deposit and was sick and tired of handing over rent money every month. Don’t get me wrong – our landlord was awesome and the place we rented was modern and in a great neighbourhood. It’s just that rent money feels like dead money (unless you’re the one receiving it!!)

In addition there were other intangibles I wanted. I like a nice vege garden but there’s no way I’m investing in one only to leave it behind. I was never going to be a tenant forever so why bother? Plus it’s hard to get rid of wallpaper that drives you insane when you’re a tenant. You know what I mean?

And every tenant knows their stay is not guaranteed even if they’ve been there for years. When you buy a house it’s yours, you call the shots about everything. I like that the most.

Reason 2 – house prices have stabilised

If you had the balls, 2009 was probably ‘the’ year to buy a house in recent times because there were a number of pressure sales. Which we did – as a rental. But taking on another mortgage for our own place was a different kettle of fish. We wanted a bit more certainty in the market before getting back in, we wanted prices to stabilise.

Prices had fallen below their 2007 peak and had stopped falling which was good. Will prices go up in the next year or two? Some will, some won’t but nothing spectacular either way. For the moment, Auckland property prices are pretty much flat as a pancake and I think the same could be said in other regions too.

Reason 3 – Interest rates are good

I think they’ll remain this way for a while too. And with rates so low it gives me an opportunity to make larger mortgage repayments as well as put some money away in my holiday account.

Will rates go up in 2012? Probably. That’s because inflation will grow in NZ and Europe might yet fall apart completely. Even so the increases are sure to be well signalled and gradual. Nothing dramatic and no real surprises which means you can plan for them.

I opted to lock in my rental property mortgage for 3 years at 6.45% just recently. That’s a bit more expensive than current 3 year rates (ooops, I jumped  a bit too soon on that one) but at that rate my tenant covers the mortgage completely so no sleepless nights for me.

For my own house I opted to go for the floating rate as this gives me the ability to jump into a fixed rate whenever I want, to pay more than the minimum and make lump sum payments if I choose plus, at approx 5.50% it can’t get much cheaper.

Reason 4 – affordability is there

Everyone talks about how low interest rates make a mortgage more affordable. Which is true but income is what it’s really about. As a self-employed person my income can be a volatile – sometimes it rains, sometimes it’s a drought. Not the kind of thing that always fits nicely with regular boring mortgage repayments. But I’d worked hard in recent years to get more regularity into my income and in 2011 that work began to bear fruit. Ahhhh.

The point is if you’re going to buy a house you must have a job and a good degree of income security because without it paying a mortgage is hell.

Reason 5 – other considerations

In recent years there’s been talk of a housing shortage in NZ. If talk becomes reality then the price of existing property will tend to increase. The NZ economy is on the improve too, just. Certainly the rash of layoffs that happened in 2008-9 has all but stopped. Both bonus factors as far as capital gain goes.

People seem to moan that there are very few houses on the market and the good ones go almost as soon as they’re listed. True. And it’s always been like that. What I really noticed is that it became really easy to spot good ones amongst the duds. The good one’s really do stand out if you’re vigilant.

Some people are saying rent levels will increase in 2012 and I reckon our landlord was about to start typing the letter so we got a wriggle on.

Anyway, that was my thinking then and it remains so now. There are clearly economic considerations behind your decision to buy a house but there are also personal reasons that count for as much – maybe more – than just the pure numbers themselves. What do you think?

In the first case we suggested to a couple that they tidy up a handful of things (especially their account conduct) before we  bothered to approach a bank on their behalf even though there were some real strengths to their position, not the least of which was a great level of income. The basic problem was they were clearly spending willy nilly and living outside their means. One of them was particularly forthright and decided to totally ignore our advice and approach their bank directly. I heard about the result through a friend of theirs (also a client). Yep, you guessed it – an embarrassing decline. What’s worse, we know that lender is a really good fit for them once they’d tidied themselves up. But they’ve blown their chances in the short term.

In the second case a prospective client had been recommended to us from a friend (again, the friend was a client) and after a quick look at the situation we determined that the current bank was not the right lender for what they wanted to do as they didn’t meet that bank’s lending criteria. Despite our advice the prospect felt stongly that their established 15 year banking relationship demonstrated loyalty and that that loyalty would ‘surely’ be rewarded with an approval. It wasn’t. .

I mention these examples not because I want to say ‘I told you so’ but because they’re a demonstration of the value we provide in helping you get the best mortgage available. We’re trying to give you as many aces as possible so that when your application lands on the credit manager’s desk they can see you’ve got a winning hand.

Although most people think the best mortgage deal comes down to interest rate and various loan features the reality is that the interest rate on offer doesn’t make a skerrick of difference if you can’t get the loan approved in the first place.

Talk to us – we deliver!

The financial stress that the world economy is under adds fuel to simmering tensions that run through many countries and right now every day it appears that Europe gets worse, as economic instability spreads from Greece, though Italy, France and even on to the previous impregnable Germany. It is at times like this that the tyranny of distance can be our friend, although while we are removed from the violence (except for some smelly campers in our cities) we see, we are not removed from the economic pressure the bad debt crisis in Europe is generating.

Fortunately for us all, this pressure has currently resulted in an easing of long term fixed rates and for the first time in some months we saw a reduction of interest rates in the 2 & 3 year fixed periods. How long this will last or whether it will continue is too difficult to know, however it now sees Variable and Fixed Interest rates closer than they have been for some time.

As such, the question that is now common, is should I fix my rates now? There is no right or wrong answer to this question although with 2 year fixed rates now matching variable there is no longer a dollar cost in buying some stability. It is just some flexibility that clients will forgo by locking in now.

The question of will interest rates go even lower is also a hard one to answer, while we are at historic low rates there is no guarantee that if the above European issues worsen that we will not see further interest rate cuts across the world. Given there is so much uncertainty perhaps the best strategy could be splitting your loan into part variable and part fixed @ a mid-term rate.

What’s Hot

It is the season to be silly and the banks are obliging with some crazy deals in the market right now. We are seeing big interest rate discounts off already sharp rates and legal fee contributions exceeding $1,000.00 regularly, talk to us, might  be surprised what we can get from your bank.

Buying a house is never as easy as some people make it out to be. Especially if you’re a first home buyer but it can be just as traumatic for more seasoned punters. From our experience we know clients hesitate because they don’t have the right knowledge to make a decision. Here are 5 tips to make your search a bit easier.

Get finance pre-approval first

If you know how much the bank will lend you can narrow the search to properties that are within a specific price range, location or a specific type. Why waste time looking at properties that will never fit the bill?

Go hard, go fast

Once you’ve got your pre-approval you should hit the open home circuit, hard. In the first few weeks aim to look at as many properties as you can. This way you get a really good understanding of what a ‘good’ property looks like and what you’re prepared to pay for it. This is hard work but well worth it.

Find out why the owner is selling

Understanding why a house is being sold may help you negotiate a better purchase.  For example completing the purchase sooner in exchange for a price reduction may suit a seller who needs to relocate urgently for work.

Be inquisitive

If a property looks good but appears cheap you need to understand why – are there hidden problems with the building or maybe the seller under pressure from his bank?

Get a team of ‘experts’ to help you through the process

Every property transaction requires conveyancing which normally means you need a lawyer. If you need finance then you need a mortgage broker. A building inspector and valuer are useful people to know. There may be others as well but it really is important to have a tight group of people who you can help you through the process.

If you want to use Kiwisaver money as your deposit, there are actually two parts to think about.

Part one is the first home withdrawal.

This is where you can take out all of the money you’ve put in, all the money your employer has put in and the interest earned on everything. You cannot withdraw any money put in by the government (ie the $1000 kick-start must stay put). To find out how much you can get out just make contact with your Kiwisaver scheme.

Part two is the first home buyer’s subsidy.

You can get up to $5000 in addition to the first home withdrawal, above. The way it works is that you can get $1000 for every year you’ve been contributing to Kiwisaver, must have been in 3 years, can’t get more than $5000. Your income has to be below certain thresholds (eg combined income for couples must be less than $100,000) and your proposed purchase price is subject to location based caps (eg in Auckland the house has to be under $400,000). To find out whether you’re eligible you need to contact Housing NZ.

The good news – is that you may be eligible for both parts.

The really good news – is that if you’re buying with someone else (partner, brother, friend etc) and both of you are eligible then you can double up and combine the subsidy and withdrawal to make a really decent deposit.

Hope that sorts out any confusion!

Locally, while the property market remains flat it is being readied for a strong 2012 on the back of the Christchurch rebuild and we are already starting to see positive signs in the powerhouse Auckland market with well-priced houses moving very quickly.

Of course we are half way through one of the strongest economic spend booms of the past 5 years thanks to the oval ball and although this light relief really will be a temporary measure, it does clearly add fuel to our positive growth.

As we enter the last quarter of 2011 we can’t see markets in Europe moving doing enough to put any pressure on interest rates internationally and therefore locally, as such we believe that it may not be until the end of first quarter or mid second quarter of 2012 before we see any movement in interest rates.

With the potential sting out of any interest rate rise for the immediate future we are reverting to our recommended strategy of early this year and suggest that the price of variable interest rate money at the moment is too good to pass up and with little risk over the next 6 months we should all enjoy the mid to high 5% interest rates currently available.

However, the above strategy does come with a caveat. You need to keep your eyes and ears open for when rates do start to move in 2012 as we are at current record lows and at some point in 2012 it will be wise to lock in for a period at these historically low rates. In fact some of our clients have been sufficiently tempted with currently available 3 year money at 6.5%. And why not?

And then there’s the price! As a prospective first home buyer you won’t have failed to notice how much cheaper an apartment is relative to a standard house in a similar location or on the city fringe. So when you hear banks like Westpac and ASB are lending 95% of the purchase price, an apartment seems immediately within your reach. All of a sudden that $15,000 you’ve saved up is a deposit on a pretty cool apartment. Or is it?

At the time of writing banks will usually require you to have a minimum deposit of 20% to buy an apartment mainly due to the historic volatility of apartment prices. By requiring a minimum of 20% deposit, banks give themselves a margin of safety should anything go wrong. So it’s totally true you don’t need a 5% deposit to buy an apartment…the reality is you actually need a bit more.

But fear not, this shouldn’t mean the end of your property search or home ownership aspirations. Maybe a change of tack is required (remember banks are keen to lend 95% on a regular house in most of the cities) or a little more time to save a bit more. Why not call us to discuss your options?

Well, I’m in the market for a house for myself right now and although the bank will lend me a certain amount I don’t want to use all of it because I have a budget that I’m sticking to. You see, I don’t want to pour all my income into home loan repayments. Nope. I actually want a life as well! For me having the ability to save up for an annual holiday and put petrol in the boat so I can go fishing etc is really important.

This is where the home loan repayment calculator really came into it’s own because it told me ‘how much loan my repayments will buy’ and in turn what price bracket I was looking at. It also told me I need to be very hardnosed when negotiating the purchase price!!

Where can you find a home loan repayment calculator? Google. Or Sorted.co.nz. And using it is very simple – just plug in the amount you want to borrow, a period of time over which you want to make repayments (20, 25, 30 years), the interest rate and you’ll get an answer.

A couple of words of caution when using a home loan repayment calculator. Firstly, the result is only an approximation because the way you structure your loan (maybe some fixed, some floating) has a bearing on the how big your repayments might be. But it’s still a pretty good way to gauge what you’re up for. Secondly, we expect interest rates will be higher in a few years time than what they are now so you’d be wise to double check to see if your budget can handle a gradual upward shift in repayments. Plug in some different rates to see what happens.

So there you have it, a home loan repayment calculator is a great tool to help with your decision making when it comes to buying a house.

Naturally the government home loans scheme has some criteria.

Clearly you need to be a NZ resident.

You don’t need a deposit if the house is worth $200,000 or less however if your purchase price is between $200,000 and $350,000 you’ll need to have saved 15% of the difference (so if the purchase price was $250,000 you’d need 15% of $50,000 = $7,500). The maximum loan in the main centers is $350,000 which implies you need a deposit of $22,500.

There are also some income caps to be aware of. For individual or joint borrowers your combined income cannot be more than $85,000pa and for 3 or more borrowers it can’t exceed $120,000pa.

All this sounds hunky dory. But for many of our clients the welcome home loans scheme is of no real benefit. Why? Simply because they earn more than the scheme allows and they want to buy in an area where houses sell for more than welcome home price cap allows.

A lot of the first home buyers we see are your classic couple – usually both are working and sometimes there are 1-2 children at home as well. They earn $85-$100 grand and now that they’ve saved around $20,000 they’re really sick of renting!

If that sounds like you then there’s a very real chance that your $20,000 savings is a 5% deposit on a property in the $400,000 bracket. And it probably won’t take too long to save another $5000 in which case a $450,000 house might be within your grasp.

The government home loan scheme is good for those on low incomes who are having trouble saving a deposit. But if you’re in a position where you have a deposit (or with some discipline and a bit of time could save one) you may not need this assistance at all.