On saving a deposit

Written by campbell | posted in Mortgages & Lending | 0 Comments

I know some new years resolutions will have included thoughts like ‘in 2012 I’m buying a house’.

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.