If you want to buy your first home, it is important you have a realistic budget from day one. It’s the first step in working out how much you can afford and how much the bank is likely to lend you. A budget also helps you focus on the right houses.
How much can I borrow?
The first step in working out how much you can afford and how much the bank is likely to lend you is to crunch the numbers to determine how much you can afford to spend on a home. This helps you focus on the right houses in your price range.
Most banks have affordability calculators, which crunch your income and spending to determine how much you can comfortably pay each fortnight or month.
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Most buyers need 20% of the home’s purchase price as a deposit in order to borrow the rest as a mortgage. With a brand-new home, the deposit is 10%. If you qualify for schemes such as Kāinga Ora’s First Home Loan and First Home Partner, it is possible to buy with a 5% deposit provided you meet certain income and property price thresholds.
To calculate how much you have for a deposit, add up how much you have saved already in KiwiSaver, other investments and in the bank. You may be able to borrow money from the bank of mum and dad, or, if you’re lucky, receive a gift that helps you gather sufficient deposit to buy.
Once you’ve worked out how much deposit you have, you will have an indication of how much you can afford to pay for a home. It is important to understand how much homes are selling for in the area you are interested in. You can find sale prices for recently sold houses, estimates based on sales in the area and also use the OneRoof House Price Report updated monthly on OneRoof.co.nz.
Supplementing income to afford repayments
How much you can borrow for a mortgage comes down to how much the bank believes you can repay comfortably.
Often, first-home buyers will seek to supplement their income to help cover the repayments by:
● Buying as a single or a couple: Buying with two incomes is usually easier than one. If you are applying for a joint mortgage (with a partner, family member or friend) the bank will calculate how much it will lend you based on your joint income and expenses. If the mortgage is 100% in your name the amount you can borrow will be based solely on your income and expenses.
● Having a tenant, flatmate or boarder: If you plan to live with a flatmate in your new home, you might be able to count some of the rent as income in the mortgage calculation. Be aware that lenders won’t count the entire rent paid to you as income.
Speak to the bank or a mortgage adviser
Your bank’s mobile mortgage manager or an independent mortgage adviser (broker) can help you do the numbers. The service is usually free. Your manager or adviser will go through your finances and advise on issues such as consumer debt and suggest ways to increase the available surplus you have for mortgage repayments.
You’ll need to learn some of the jargon
● Loan-to-value ratios (LVRs): the percentage of the loan that the bank is willing to lend. It adds up to 100%. So, if the LVR is 80%, you need a 20% deposit.
● Debt-to-income ratios (DTIs): the Reserve Bank of New Zealand announced that from July 1, 2024, it would introduce DTIs. They limit the amount you can borrow according to your income. If your joint income is $150,000, for example, and the DTI is six, then you can only borrow six times $150,000 or $900,000.
● Credit Contracts and Consumer Finance Act (CCCFA): a law that requires lenders to act responsibly. It can, however, restrict how much home buyers can borrow because banks are required by law to ensure the loan is affordable for the home buyer.
Getting in touch with a mortgage adviser or mortgage manager will help work out what's possible. Photo / Getty Images
Pay more than the minimum repayment if you can
Most first-home buyers take out a 30-year mortgage because the repayments are lower than shorter mortgage terms. However, the longer the mortgage term the more interest you will pay in total over the lifetime of the loan.
If you can afford to, it is worth budgeting for higher repayments or a shorter loan term (25 or 15 years).
What you can afford now might change in the future
When banks assess whether they will lend to you, they use a test rate which is several percentage points higher than the actual interest rate. This helps ensure you can afford the mortgage if interest rates go up. It is still a good idea to create a personal budget based on your actual expenses.
Things to consider
A home-buying budget takes into account how much you earn, how much deposit you have, the costs of buying, and what your one-off and ongoing expenses will be after you move in.
Make sure you calculate the upfront costs of buying a home such as lawyer’s fees, builder’s reports and LIMs, and also new ongoing costs such as council rates, body corporate fees and house insurance.
Using KiwiSaver
Saving for a house deposit requires that you spend less than you earn. Most first-home buyers save with KiwiSaver. There are many advantages to this:
● Employers match employees’ contributions up to 3%, although some employers use a “total remuneration” clause in the employment agreement to avoid paying this.
● You’ll receive the annual government contribution of up to $521.
● You can withdraw your savings, employer contributions and investment growth at the time of buying for a deposit.
● You won’t be tempted to dip into your savings for everyday spending.
What are the upfront costs and legal fees?
The total amount of money you need to buy a home is more than just the deposit. Upfront expenses for buying a home include:
● $1000 to $1500 for conveyancing/legal fees
● At least $400 for each building inspection
● Around $300 for each LIM (Land Information Memorandum)
If a house purchase falls through and you have to start again, you may have to pay more than once for building inspections and legal fees. It’s unfortunate, however your building inspector and/or lawyer can save you from buying a lemon.
Additional costs
Moving in also costs money. There are removal truck costs if needed, utility connection fees and you will need to buy furniture and furnishings (unless you already own these).
The cost of buying a home doesn’t stop with moving in. You may need to budget for renovation costs.
Ongoing expenses include fortnightly or monthly mortgage repayments, utilities bills, council rates, home insurance, and maintenance. In many apartment complexes, you will have body corporate fees to pay, which do at least cover your maintenance and insurance.
Your mortgage also can have hidden costs such as lenders mortgage insurance (LMI)/Low Equity Premiums (LEP) if your deposit is less than 20%.
>> Next steps: The OneRoof first home buyer's guide part 2 - Saving for a deposit
