How much do you need in your pocket to buy the average Kiwi house?

COMMENT: New Zealand’s average property value broke through the $1 million barrier in September and is now sitting at just over $1.05m, according to the latest house price figures from OneRoof. Recent figures released by property valuation firm QV show the same eye-watering sum for the average Kiwi house.

Rising interest rates and the tightening of home loan rules have also altered the buying landscape, so it seems like the perfect time to review how much deposit and income you would need to buy a home in New Zealand.

Let’s deal with deposits first. Changes to the loan to value ratio restrictions this year have made purchasing with a 10% deposit very difficult, and buyers should expect to have at a minimum a 20% deposit to hand, but for the sake of argument let’s stick to a scenario where a 10% deposit is possible.

A 10% deposit on a $1m house is $100,000, leaving buyers with a mortgage of $900,000.

The next possible hurdle facing buyers come in the form of Debt to Income ratios. These restrict the amount an applicant can borrow to between 6x and 7x their household income (pre-tax), and while not every bank has adopted DTIs, two major ones have and the Reserve Bank is seriously considering mandating them for the rest.

At first glance, the threshold for a $900,000 mortgage would seem achievable to many Kiwis. A ratio of seven would require an applicant to have a household income of $128,571 (one-seventh of $900,000). For couples that translates to $64,000 each.

But the amount of required income is actually a little more nuanced than that. Applicants at that income level would need to be living extremely frugally and have no secondary debt (e.g. credit cards, buy now pay later purchases and student loans). Living frugally means no takeaways, minimum expenses on clothing and household items, and minimal entertainment expenses (including TV subscriptions, etc). The applicants will also want to own just one reasonably priced car (no lending against the car, obviously) and have no children.

It’s, therefore, more likely that anyone with even minor expenses in their life will need to be more towards a household income of $150,000 or higher.

Minimum income is a very grey area, not a line in the sand. For example, one income of $150,000 a year is taxed at a higher rate than two incomes of $75,000 so if you’re just below this level, it’s still worth investigating. Banks also vary significantly in how they calculate what’s affordable. One bank may approve a client for $100,000 more than the next bank. A common example of this is with outside-of-the-box income like overtime or commissions. The amount a bank will take this income into account varies wildly from lender to lender.

The key takeaway is to minimise your spending for at least three months to show the bank you are in control of your money. This means, no matter what your money situation, the maximum amount of your income is able to be put towards your mortgage once you’ve found a house.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.