Five steps to getting a foot on the property ladder

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Owning a place to call home has become a bigger step to take for many Kiwis in recent years simply because the cost of homes has increased so much - it’s as if the first rung on the property ladder is broken and you now need to step up to the second one.

According to Government figures, only about half of New Zealand adults owned their homes in 2013 and 33% lived in rented houses, a figure that grew to 37% in 2017.  Despite this growth in renting the  demand and desire to have your own home hasn’t decreased.

The change in the housing market over the last year or so, in Canterbury and some other key regions, has given first home buyers a window of opportunity, shown by the growing number of first-time buyers in the market.  Getting on the property ladder is looking easier in 2019 as prices have plateaued or eased and interest rates remain at all time lows, even with some mortgages dipping below a 4% annual interest rate.

So, with stars aligning you may be thinking harder about taking the first step towards property ownership, and if you are wondering where to start,  here are some very important tips:

1. Getting your head in the right space

Having the right mindset for a goal is extremely important - in the same way an athlete mentally prepares before a race, you will need to do the same.

Buying a house is not only about finding the right one, even a dream home, but also planning, arranging finance and doing a lot of research.

Thinking ahead about what’s to come can also greatly sort out any issues, as they arise.  This is most important if you are buying with someone else - you both need to be on the same page.

Part of this is being realistic, and practical, especially when it comes to the size, style, and type of house you want.  As a first home buying couple, purchasing a two-bedroom unit may be a good solution, as opposed to a larger stand-alone home.  If you are single, possibly an apartment would be the best first step.   The practical part of this is buying something that is affordable, won’t stretch you unnecessarily, will allow you to keep on doing things you enjoy and one that you can use as a step towards a bigger home in the future.

It’s important to remember that purchasing a home is a lifelong process - the first is exactly that, and there will be others and may be the next one will come along in the very near future.

Here is the story of Brendan and Kate to show you what we mean:

"Recently engaged, Brendan and Kate bought a two-bedroom unit in Riccarton for $350,000, with an 80% mortgage of $280,000, after saving for a 20% deposit of $70,000.  At the time of buying, this $70k represented the equity they had in the house, or the difference between the value of the home ($350k) and the mortgage debt ($280k).

Over the next three years, they pay off $500 a month from their mortgage principal - or $18,000.  At the same time, the value of the property goes up by 3% per year.

They then decide to look for a bigger house as they are expecting their first child.  Their house is now valued at $382,000, and their mortgage has reduced to $262,000, meaning they now have equity of $120,000.  They can now buy a larger house and being realistic they have decided to find a 3-bedroom home in the same area for between $400,000 and $450,000". 

2. Things to do first

Save for your deposit. Once you’ve made up your mind about buying your first home, it’s time to build your deposit.

There are a hundred and one ways to save money and plenty of advice out there - the New Zealand Government Sorted website is a good place to start.  

Key steps to take include: set up a savings goal, use a budget planner so you can see where you can cut costs, be strict and save all the time.  By this we mean, skipping some luxuries such as something as simple as a coffee and then putting the saved money into your deposit.  Every little bit counts.  You can keep track of your savings easily by setting up a separate savings account.

Two people saving is easier than one, as long as you are both working, but you will need to have a joint plan and work as a team.  And remember the larger the deposit you have the less interest you will pay on debt when you do buy your house.

The ballpark for a deposit is 20% of the house value, so a $400,000 home will need an $80,000 deposit.  There are some exceptions like a Welcome Home Loan Scheme, which requires a 10% deposit for first home buyers, but you need to meet certain criteria.

Think about Kiwisaver as an option. There are pros and cons of using your Kiwisaver to help you raise the funds for a deposit, and this is all down to your long-term financial goals and planning.

The big plus is it will help you save more quickly and the big minus is dipping into long term savings that are designed to help you later in life.

At the end of the day, it comes down to your priorities.  In fact, using Kiwisaver for a deposit is popular with a recent industry study reporting 74 percent of 18-24 year olds saying the main reason for being in Kiwisaver was to build a first-home deposit, compared to 59 percent of 25-29 year olds and 16 per cent of those aged 35-54 years.

If you have been contributing to Kiwisaver for over three years you are able to withdraw money for a house deposit.  In addition to this, if you meet income and house price criteria, you can also qualify for a HomeStart Grant of $5,000 per person or $10,000 total for an existing house, or $10,000 each for the purchase of a new property.

3. Get a house buying team together

There are some key people you need at your side to help you buy your first home.  It’s worth getting to know them!

The first is your mortgage broker, who will be able to advise you about the different lending options there are and how much you can borrow.  Your broker will also ask about the points we’ve discussed above and provide advice that will support you on your way to your first house.

Most importantly they will help you achieve pre-approval for a mortgage. This is when a funder, such as a bank, conditionally approves a loan before you apply to buy a house after checking your income, assets and finances, and assessing whether you'll be able to repay the debt.

Other members of your team will be a lawyer or solicitor, who will be responsible for what’s called conveyancing, or the change of ownership paperwork, called the Sale and Purchase Agreement.  As a buyer, your lawyer will manage all conversations with the seller's lawyer and make sure all of the conditions relating to the sale have been met.  Your lawyer will advise on any issues, manage the possession and settlement process, and the exchange of money and keys.

Make sure you also have a building surveyor on your list of contacts to assess a property before you buy - remember, buyer beware!  It is your responsibility to make sure there are no major faults with the property that could cost you dearly later on.

Real estate agents - it’s always a good idea to get to know a couple who specialise in properties in the area you want to buy.  The idea here is if they know what you want, they will be able to keep you in touch with houses coming on the market.  The best case scenario is you find out about a property before others and this could be an advantage.

Family and friends - don’t forget to tell people close to you what you are doing.  It’s a big step you are taking, a lot of the people you know would have trodden the same path, and there will be plenty of handy advice around.

4. The search

This is the fun part, but there’s still work to do. Make sure you have a list of absolute musts for your first home,  what is negotiable and what are absolute no-no’s.

If you have no idea where to start, try hitting the streets one weekend and getting an idea about what’s for sale.  This will help you narrow down your choices and assess which properties are worth considering.

If any of the houses on your shortlist is up for auction soon, make sure you go along. Auctions are a popular way to sell homes, and you’ve probably even seen them on TV property shows.  But attending one will give you a better idea on how the process works and will give you confidence on taking part when you are ready.

5. Celebrate

This is even more fun!  You’re  settled in your new home - congratulations.

You are now on the first rung of the property ladder, and this is only the start of your journey up.  Give yourself a pat on the back and have your family and friends over for a housewarming party.

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Being a first-home buyer can be a daunting task and it takes courage to make the leap.  Come and talk to us at Taurus Home Loans and we’ll be with you every step of the way.

Posted 27 Mar 2019