First Home
Buying your first home can seem challenging, but it doesn't have to be
There's a lot to know when it comes to getting a home loan. On this page, we cover off some of the handy things you'll need to know as you make your first purchase. For more information specific to your situation, request a call back from one of the team.
Assessment Criteria
Deposit
Kiwisaver
Kāinga Ora
Assessment Criteria
Purchasing your first property should be exciting but it is also likely to be the biggest purchase you will make. For most people, to buy a property you will need a loan from the bank. There can be a lot of terminology that you will run into during the application process so here is a simple breakdown of the assessment criteria. For Our Mortgage process page outlines the steps from start to finish.
Security
This refers to the property you will be purchasing. The lender will obtain a mortgage over this property which is a legal term that means they are lending you money but will have an ownership or ‘legal interest’ in the property. This agreement will be void once the lending is cleared and you will own the property outright but while there is lending remaining they have a degree of control over the property. If you were unable to make payments then they are able to sell this property in order to recover their funds owed.
LVR
The Loan to Value Ratio refers to limits on how much you are able to borrow against the securities value. Banks each have their own limits to LVR but they are guided by the reserve bank which sets limits on what the banks can do.
Your standard owner occupied LVR is at a maximum of 80% of the property value. So for a property price of $800,000, the maximum loan is $640,00. This means you will need to supply $160,000 deposit. Banks do have the ability to go above this 80% limit and offer high LVR/low deposit lending. This is discussed further under low deposit lending.
Servicing
If you meet the deposit requirements then the next step is to meet servicing assessment. This is the banks way of judging whether you have the ability to make the repayments or not. Each bank has different servicing ‘calculators’ which is their tool the develop to try and assess your servicing. The calculation essentially looks at all your proposed outgoings and income to determine how much money you will have left over once all your living expenses and debts are repaid. This calculation is adjusted to allow for risk so the interest rate you are tested on will be higher than If you are within
Deposit Requirements
When your purchasing your first home that you intend to live in, this is referred to as an owner occupied property. The standard deposit requirement is 20% of the purchase price. There are options available for lower deposit amounts, as low as 5% if you are eligible for Kainga Ora. There are limits on how much lending banks are allowed to supply for less than 20% deposit, so there are few more requirements and things to keep in mind.
10% Deposit
If you have 10% deposit and don't fit into the Kainga Ora requirements, then there are still options for lending. The RBNZ puts limits on how much lending can be offered with a 10% deposit and this can be reviewed as the housing market changes. Banks need to control how much lending they offer with a 10% and so the barrier to entry is raised. Often this means, higher monthly surplus requirements and low availability of pre-approvals but these policies regularly changes so it pays to check with an adviser and see what is available currently. You can generally expect to need to pay for a valuation as part of the approval process for lending, once you have a signed Sale & Purchase Agreement.
Low Equity Pricing
With less than a 20% deposit, the banks deem this as 'riskier' lending and as a result you are likely to incur higher interest rates. This usually means a low equity margin is charged which is a percentage above the banks standard interest rate offer. These margins tend to be scaled down if you can get to a 15% deposit. Once you own the property for a while, you will be paying down the loan amount and hopefully the value begins to rise, both of which provide you with more equity. Once you can show you have 20% equity in the property, you can aim to get any low equity margin removed. If you started with a 10% deposit and now you have 15% equity, then you can aim to get your margin reduced. Banks don't tend to be very proactive about this becuase they are making more money via the higher interest rate, so working with an adviser is a good idea to keep reviewing your equity position. Some banks can offer more attractive low equity rates so working with an adviser to shop around could save you money.
Exemptions
As we looked at above, there are limits around how much banks can provide to 'low equity' borrowers and the pricing isn't as attractive. However, there are exemptions in place which aren't captured in these limits so banks can offer pre-approvals and get access to better pricing. We will discuss the Kainga Ora exemption further below and the other exemption is for 'new build' properties. For a property to be deemed a new build it needs to fit into the below categories.
- House & Land
- Turn-Key property
- Purchased from the Developer and Completed within 6 months
Pre-approvals are generally more available for this and some banks will offer new build specific offers. These offers can vary but an adviser can let you know what each bank is offering when it's time for you to begin your property hunt.
Kiwisaver
A common source of deposit is Kiwisaver funds. As it comes directly out of your pay, overtime this account can grow to a sizable amount which you can use to put towards a purchase of your first home. You don't have to use it for your deposit but it will likely be the last chance you get to access these funds before you turn 65.
Accessing your Kiwisaver
To get access to your Kiwisaver funds to be used as a deposit, there are a few things you will need to meet in order to qualify
- You must have contributed to Kiwisaver for at least 3 years
- This will be the first home you have purchased*
- You must intend to live in the property for at least 6 months
*It may be possible to draw on your Kiwisaver if you have already owned a property in the past if you are deemed to be in the same position as a first home buyer. This is referred to as a 'second chance' withdrawal.
If you meet these conditions, then you are able to withdraw of your Kiwisaver balance except for the initial $1000 government Kickstarter which must stay in the account. Often, a Kiwisaver withdrawal letter will be a condition of your pre-approval so you can apply for this directly through your Kiwisaver provider or for further guidance you can visit the Kiwisaver website.
Accessing your Kiwisaver
If using Kiwisaver towards your deposit, then any bank which issues you a pre approval will need to see a 'withdrawal confirmation letter'. You can approach your Kiwisaver provider and they will send you through a letter confirming how much you have available to withdraw.
When you confirm your Sale & Purchase Agreement for your new property, you will be expected to pay a deposit to confirm the contract, usually 10%. If you're intending to use Kiwisaver funds for this then ensure you have enough time to get this released.
Kāinga Ora First Home Loan
Buying your first home is a huge financial commitment and it can be challenging to get a suitable deposit. Kāinga Ora has been established to make it easier for first home buyers to purchase a property. Under the First Home Loan, you only need a 5% deposit rather than the standard 20% and 10% limits required by most lenders.
Eligibility
The Kainga Ora offer is designed to help those who need it most so there are some limitations which you can review through the Kainga Ora Website. These are notably before tax income caps which you can review through the Kainga Ora website but for a quick look these are listed below.
- $95,000 or less for an individual buyer without dependants
- $150,000 or less for an individual buyer with one or more dependants
- $150,000 or less (combined) for two or more buyers, regardless of the number of dependants
Considerations
Not all lenders work with this initiative have their own policies that borrowers also need to meet. The main lenders are Westpac, Kiwibank, SBS, Co-op, SBS, Unity and NBS.
As part of this programme, these lenders offer special pricing just for First Home Buyers that qualify through Kainga Ora. There is a 'Lenders Mortgage Insurance' fee which is currently 1.20% of the loan amount and can either be paid up front or added onto the loan.
There are a few quirks with Kainga Ora applications and with a range of participating lenders, it can help to work with an Adviser to guide you through this process.