It’s not always easy to buy your first home but it’s not much fun renting either, especially if you believe that you will remain renting forever.
After being a mortgage adviser for over 20-years I know that it’s not always easy to buy a home, but sometimes you need to look outside of the ordinary bank mortgages.
We know that rents for new tenancies nationwide rose by 5.8 per cent in the year to December, according to Stats NZ’s latest rental price index and when you add that to the inflation increases of 5.9 per cent then tenants are going to need a serious increase in their incomes or are going to have to make some lifestyle changes.
Buying a home may be more expensive than renting now, but have you thought about the long term?
In this article we discuss why you should try and buy your first home, why waiting can be more expensive, what lenders look at and potentially a way to buy that you may not have thought of. I’ve also added a podcast here for you.
Why You Should Stop Renting As Soon As You Can
Renting may seem like the only choice that you have right now.
Most people have rented for a time, including many that have managed to buy a home.
There are many reasons that people want to buy their own homes and these include;
Stability – when you own your own home you have more control of your life including ensuring that you have a permanent place for you and your family to live. If you have children this can be a huge advantage as they are able to stay at the same school and live near their mates, but it’s not just children that can benefit from this sort of stability.
Livability – when you own your own home you can make adjustments or renovate to ensure that the house is suitable for the way that you live, or just to create an environment that you want for your home. It may be as simple as splashing around some paint, removing a wall, adding a deck or doing a renovation or extension.
Ability to Add Value – you can make adjustments or renovate your home, but with planning you can add significant value to to your home which can give you financial choices. For some this may mean the ability to move into another home that may suit better, or it may mean that you can buy into investments.
Reduce Your Expenses – when you are paying rent you have very little control over the rental costs, and when you are nearing retirement the increasing rents can be a real concern. When you own your home you will most likely start with a large mortgage, but over time you will pay that off and then your home ownership costs will be minimal compared to renting.
As you can see there are some real advantages to owning your own home, but initially it may be more expensive especially if you want to stay living in the same type of home or area.
Many property investors will want a yield of 4% – 5% on their investments, so therefore the the property value would be 20-25 times the annual rent that they would be charging. This means a house that is rented for ‘say’ $400 per week might be worth about $500,000 or one rented for $750 a week might be worth closer to $1,000,000.
If you were to have a mortgage to buy a home then you have to pay off the mortgage, and using an interest rate of ‘say’ 4.50% over the standard 30-years then $400 per week would pay a mortgage of about $340,000 and $750 per week would pay a mortgage of about $600,000.
This means if you want to keep the mortgage repayments closer to the rent that you are paying then you would either need to downgrade the type of home you are living in, or have a large deposit.
But it’s also important to think what is best over the longer term.
Buying Your First Home Can Be Hard
If you want to buy your own home then you need to start somewhere, and that is most likely going to mean starting with a home that is not as good as what you are renting.
Most first home buyers need to make some changes to get their foot in the door.
The most important thing is to understand how the various lenders think and what they are looking at when they assess an application for a mortgage. Banks have some very particular policy, but each banks policy is slightly different. Then there are the other non-bank lenders which have different policies too.
The important criteria the lenders look at are;
Income – having enough income is probably the most important thing that a lender will look at. It’s not just how much income you have, but the lenders look at the sustainability and reliability of the income. They want to know that your income is regular and going to continue. Bank policy can be quite prescriptive and they can scale or not even consider some types of income.
Expenses – the lenders are looking closely at income, but even more closely at expenses. They now will go through your bank statements and want to identify all transactions.
Other Debt – it’s common for first home buyers to have other debt and this all has to be allowed for when considering the affordability. Too much short-term debt can make getting a mortgage hard as those repayments need to be paid along with any mortgage payments, but it doesn’t mean that you cannot get a mortgage. If you have debt then it needs to be looked at and there may be a way to consolidate it into a lower cost loan.
Savings – of course when you are purchasing a first home the lenders want to know that you have a deposit and can also afford the mortgage repayments which are often larger than the rent that you have been paying. Most Kiwis have KiwiSaver now and use this for the deposit, but it’s also a good idea to have regular savings equivalent to what the mortgage repayment would be (rent plus savings = mortgage repayment) as this shows the lender that you can realistically afford the mortgage.
Account Conduct – the lenders will do a credit check and also review your bank statements as these give them a good idea of how you manage money. It’s one thing to have a large income, but often it’s more important to manage what money you have well.
There will be other things to consider, but if you are planning to get a mortgage this year then these should be the first things to look at.
What About The Deposit?
This is one of the biggest challenges for first home buyers, and is a key reason many delay the purchase or never purchase at all.
If you talk to the banks then you may have been told that you either need a 20% deposit, need to fit the First Home Loans criteria or you must buy a new build. This has been the standard response from the banks in recent times, but it’s important to consider the non bank lenders too.
Many first home buyers do not have enough saved to make the banks deposit criteria, but they have the income and ability to service the mortgage repayments.
Consider The Co-Ownership Option
One way to get into your own home with a lower deposit is using co-ownership where a company holds equity in the home and you can buy that share later.
If you have at least 5% deposit then you might be able to use co-ownership.
You use your 5% deposit and get a mortgage for 80% leaving the co-ownership company to fund the remaining 15% so you effectively have 85% of the home with the option to buy the remaining 15% later. It’s better if you have more than 5% deposit as it means you need less via the co-ownership company.
It’s definitely an option to consider as it allows you to buy into your first home earlier than you may be able to do.
Tell us your story and we can advise you about both the bank mortgages and non bank home loans so you can buy your first home.
