Great, so you’ve made the decision that property ownership is right for you. So, what’s next? In order to get a mortgage from the bank, you’re going to need to have some skin in the game. Your deposit refers to the amount of your own money you’ll be contributing toward the purchase of your first home. Generally, with a first home-buyer, the bank would like you to contribute at least 5%-20% of the value of the property.
Hopefully you already have a job, and are well on your way to building up some sort of genuine savings. Before getting a good idea of your maximum affordability, you should understand how you’ll be sourcing your deposit.
Step 1: Pay down any outstanding credit cards and personal debts
If you’re in the situation where you have a store card, credit card, or personal loan, the most important thing you can do toward sorting your deposit, is pay these down. They’ll eventually negatively impact how much you can afford, and are costing you a lot in interest every month.
There’s no downside to having a credit card, as long as you’re paying it off in-full at the end of every month. That would mean you aren’t paying any interest on it month to month, and it’s not a pesky balance transfer card that’ll eventually end up with an interest expense.
The reason why it’s important to first start by paying off your extra debt, is that it’s going to be detrimental to your personal savings capacity. All of your extra debt also creates a monthly ‘expense’ that the banks will consider, and therefore reduces your capacity to borrow at your maximum potential.
Step 2: Start accumulating genuine savings
When building your deposit, the banks look very favourably upon customers who can show a track record of genuine savings. It shows you’re able to manage your monthly expenses, and aren’t spending more than you earn. Sometimes we can also use this as a strong mitigant for potentially getting you that little bit extra from the banks.
When building your deposit, take what you already have as a deposit, and forecast how much more you expect to be able to save between now and the time at which you think you’ll be ready to make your first purchase. Keep these two figures handy when talking with your adviser.
Step 3: Check with your Kiwisaver provider if you’re able to withdraw your Kiwisaver savings toward your first home.
If you’ve been contributing toward your Kiwisaver for at least three years, you should be allowed to withdraw the full balance of your Kiwisaver savings, minus the initial $1,000 gifted to you by the government.
The government won’t let you use this toward the purchase of an investment property, but it can be used toward the purchase of an owner-occupied home. You’ll need to live in the home for at least 6 months if you’re planning on using your Kiwisaver toward the deposit.
If you’re unsure whether or not you qualify, it’s best to contact Housing New Zealand, as there are a couple of cases where you may not be a first-home buyer and still qualify. You can find out more here.
Step 4: Apply for a Kiwisaver Homestart Grant through Housing New Zealand.
If you’ve been contributing toward your Kiwisaver for three or more years you may be entitled to a Homestart Grant, which is potentially an extra $20,000 toward your deposit!
How much you’re eligible for depends on two things.
- How long you’ve been contributing toward your Kiwisaver
- Whether or not you’re buying a new home, or an existing dwelling.
How long you’ve been contributing:
Contributing for 3 years
Contributing for 4 years
Contributing for 5 years
To qualify, you must:
- have a household income (before tax) of less than $85,000 per year (for one person), or less than $130,000 per year (for two or more people)
- have a deposit that is 10% or more of the purchase price, including the addition of the grant
- be planning to live in the house for at least 6 months from the settlement/completion of the property.
You’re also limited by the following regional pricing caps:
House price cap for existing/older properties: $600,000
House price cap for new properties: $650,000
Hamilton City, Tauranga City, Western Bay of Plenty District, Kapiti Coast District, Porirua City, Upper Hutt City, Hutt City, Wellington City, Tasman District, Nelson City, Waimakariri District, Christchurch City, Selwyn District, Queenstown Lakes District
House price cap for existing/older properties: $500,000
House price cap for new properties: $550,000
Rest of New Zealand
House price cap for existing/older properties: $400,000
House price cap for new properties: $450,000
Double the government contribution by buying a “New Home”
A new home is considered to be a home that’s received it’s code of compliance within the 6 months since Housing New Zealand receives the Homestart Grant application. The home will only qualify if it’s a completely new dwelling, and not a relocated house onto a vacant section, or an existing home that has had extensive renovations and a new code of compliance issued.
If you’re thinking of buying a property “off the plans”, before it’s been built, you can access the grant prior to settlement to help you with your deposit. It’s always best to speak to your adviser before this point to make sure you’re going to be able to afford the house on completion.
This application process can take up to 20 days for Housing NZ to process, so it pays to start the process early.
If all goes well, and you’re looking to build your deposit with your partner, or with a sibling, between the two of you, the Homestart Grant could be contributing an extra $20,000 toward your deposit.
What about someone who’s looking to buy their first-home with someone who’s owned property before? Well, the good news is, the person who’s never owned property before will be eligible for both the homestart grant, and the Kiwisaver withdrawals. However, the bad news is, the other party won’t be able to use either.
Step 5: Ask your parents or family to contribute through the way of a “Gift”
Many first time buyers are having to tap family on the shoulder for a hand-up to get onto the property ladder. While at first this may be something that makes you feel a little uncomfortable, it’s a lot more common than you think, especially in Asian families who are very focused on building inter generational wealth. Many older people who have owned property for years have untapped equity that could be leveraged to help you into your first home.
The best way to do this is through a “gift”. You can download our template gifting letter here. While a gift is non-interest bearing, and there’s no legal cause for it to be paid back in the future, a lot of our clients enter a gifting contract with the intention of repaying the money at some point in the future. This can often be the difference between you being able to make that first step onto the property ladder. The way we have been able to achieve this for clients is by topping up their mortgage after a few years of capital gains, when their property has increased in value.
While not all parents are in the position to be able to withdraw $50,000 from their bank accounts, many do have the capacity to withdraw this as equity from their homes, and it may be a small price to pay to get you out of the house and into your own place.
If family are unable to outright ‘gift’ you the cash, there are other options, such as cross securing the properties, or formalising a loan between the two parties. Generally these options create more risks than gifting, which is why it’s best to ask your adviser to walk you through the differences.
Step 6: Calculate how much you can contribute
Hopefully by now you’re able to contribute a lot more than you’re expecting toward the purchase of your first home. Let’s take a look at a recent client example.
Purchase Price $650,000 (new build in Auckland)
Total Available Deposit: $130,000
Genuine Savings: $40,000
Forecasted Savings: $10,000
Kiwisaver Withdrawal: $40,000
Homestart Grant: $20,000
Gift from father: $20,000
For Matthew and his partner Jane, they were able to contribute $130,000 toward their first home, and purchase a new build (turnkey) property in Hobsonville point in Auckland for $650,000. They were able to contribute a 20% deposit, which qualified them for the bank’s lowest rates (using irefi as their advisers, the rates were actually lower than the bank’s special rates). While part of this was $10,000 worth of forecasted savings, because they had 12 months before the build was complete, they had extra time to get the full deposit together, and were able to purchase a property they initially thought was unaffordable.