John Bolton is a mortgage broker and CEO of Squirrel.
OPINION: Much has changed in the New Zealand property market since the end of last year, and for first-time home buyers it has created new challenges and opportunities.
On the one hand, the market is slowing down. The days of insane house price growth fueled by collective FOMO are over. A combination of higher interest rates, the removal of tax deductibility for investors, increased supply and a relatively static population has brought back a much needed balance.
That’s the good news.
On the other hand, new loan-to-value ratio (LVR) restrictions and hyper-prescriptive responsible lending laws (CCCCA) have made it harder to get a home loan.
In the short term, tighter LVR restrictions will mean big problems for low deposit borrowers, but those will start to ease very soon. The CCCFA laws aren’t going anywhere in a hurry, though, and that means more work getting you ready for the bank.
But don’t lose hope. You can do a lot to set yourself up for success.
Organize your expenses (and your savings)
Under the new laws, lenders scour bank statements (and spending habits) with a fine-toothed comb.
What they’re really looking for is proof of regular, intentional savings – and that between those savings and your rent, you’ll be able to cover your mortgage.
If you know roughly how much you want to buy, what your deposit is, and therefore what you need to borrow, jump online and put it all in a mortgage calculator at around 6% interest.
This reimbursement figure is what you need to prove that you can afford it. And every dollar you spend, when you could save it instead, is going to make it harder to do.
When you’re getting your finances in order, remember: the goal isn’t to cut out everything that makes you feel good about life. So you’ll have to cut back on things like going out to dinner, but you probably won’t need to cancel your gym membership.
And the sooner you can start, the better.
Paying off consumer debt
Putting your finances in order also means cleaning up your credit. Pay off credit cards as soon as possible and get rid of unused credit limits or accounts.
“Buy now, pay later” services and interest-free purchases from retailers should be avoided. The new laws mean that even if you don’t use these facilities when you go to apply for your mortgage, the lender has to factor them into your outgoings – so that’s bad news by any measure.
If your student loan is small enough, cancel it
Student loans are probably the single biggest expense that impacts your affordability.
A student loan takes 12% of every dollar you earn over the repayment threshold, after tax. If you’re making $80,000 a year, that’s about $600 a month — which in your bank account would give you about $95,000 more borrowing capacity.
It might be worth using some of your deposit to pay off the debt
When it comes to home loans, a 20% deposit is gold. If it’s within reach, keep saving.
Anything between 10 and 20% is considered ‘low deposit’, and for banks it doesn’t matter which end of the scale you are on – they treat them all the same.
(Working with less than 10% is really tricky right now. You have to meet a lot of criteria and tap into a niche product like Squirrel’s Launchpad to help you cross the line.)
So if you’re comfortably above 10% but 20 is too much of a stretch, you might have more to gain by using some of your deposit to pay off your debts.
Before moving forward, you should always speak with a mortgage broker to see if this approach is right for you.
Don’t throw it all away on KiwiSaver
We see many people maxing out their KiwiSaver contribution as a means of forced savings for a house deposit. But unless your employer matches that contribution, you’re better off sticking to 3% and putting the extra funds into savings.
This is because, up to my last point, it is much more difficult to use KiwiSaver to pay off a debt before you buy than if that money is in the bank. You’ll also demonstrate intentional savings behavior – and lenders love it.
Manage childcare costs
If you have children, there’s not much you can do about childcare costs, but they will have a big impact on your affordability, so anything you can do to reduce them is worth doing. considered.
There are milestones where costs can drop – when you can apply for the ECE grant (3-5 years) or when children start school – and these can make a big difference. Remote work can also be great if it means you can handle childcare during school hours.
Finally, talk to an expert
When the stakes are so high, navigating new changes in the law will seem daunting, and a good mortgage broker will be your best resource to help you.