Buying a house is the biggest financial commitment you’ll probably ever make - the mortgage industry is full of jargon and it can sound complex, but it doesn’t have to be. Follow this quick guide to understand the basics of mortgages and buying a home.
How much can you afford to spend?
There are two factors that a bank looks at when you apply for a mortgage. The first is your deposit. Back in the days when banks were loose and the world didn’t understand sub-prime mortgages (before the global financial crisis), you could get away with a 10% deposit. Now, you’re going to need at least 20%. This will largely dictate the maximum price of your house.
The second thing is your ability to service the mortgage. How much can you afford to repay each week? At this point, you will need to set a budget.
Write a budget
At this point you may cringe and want to scroll on past, but wait! Everything you know about budgets is a lie! If the word ‘budget’ makes you feel a little itchy, you might be suffering from the cabbage soup effect. Budgets should be realistic and allow for going out with friends and occasional splurges on unrealistic shoes - not sentence you to a life of sausages and rice eaten on the floor of your unheated lounge. Just like super strict diets (like the cabbage soup diet), a tight budget has the opposite effect to that intended. It makes you miserable and prone to spending money that you can’t afford to, the money equivalent of eating chocolate bars at midnight.
Your bank manager will want to see this budget to understand that you can afford to pay your mortgage each month. The average mortgage is 33% of household income in most of NZ (although this rises to be 55% in parts of Auckland).
So, be realistic. Write down all sources of income. Then all expenses- include rent, power, phone, transport costs, childcare, food, clothing, everything. Be realistic and honest with yourself. Subtract the expenses from the income and (hopefully) you have a surplus every month to put into your savings account. Wait… you DO have a savings account?
Have a savings account
Over and above KiwiSaver, you should have a savings account. Three to six months of living expenses is a good amount to cover unexpected expenses or if for some reason you have a loss of income.
Even a few dollars a month adds up quickly and soon you’ll have a buffer built up for emergencies.
What does your mortgage pay for?
Buying a home incurs a lot of expenses that you need to be prepared for. Paying for building reports and valuations, then lawyer and professional fees for doing the legal work, rates (which will likely be calculated from the day you move in) and finally, moving costs.
And once you’re in the house, there are expenses that you invariably need to pay for. Do you have all the furniture your new home needs? Do you own gardening equipment? Are you intending to do the house up and renovate? You need to make sure that these expenses are accounted for and planned for in your accounts. If you borrow to the maximum then those expenses may push you into larger debt.
How to find a good mortgage
Finding a mortgage is surprisingly simple. Once you’ve decided how much you can afford to borrow, you really just want to find the cheapest interest rate.
Fixed, or Variable
A fixed mortgage rate is when your debt has a set interest rate for a fixed time period. You can set your mortgage to e btween six months and five years, so that you lock in the interest rate and have a predictable repayment rate.
This is great if the OCR is increasing or interest rates are rising, but what if it looks like rates are dropping? If that is the case, opt for a variable interest rate. It means that you ride the wave of whatever the market is doing, and you can set it to fixed if it looks like it’s going to go up.
Remember, you can negotiate with your lender, especially if you have a good sized deposit or you are using your existing banking supplier. The other things to check- and compare with other providers- is any setup fees, and if you are penalised for early repayment.
Pay off your mortgage, fast
The absolute best thing to do is pay off your mortgage as fast as possible. Pay more at the start to get the bulk of the loan down so that you are paying less interest. Think about money-saving measures such as getting a flatmate in to help pay the rent, at least in the first few years.
What’s your credit report like?
Your credit score will affect the likelihood of your lender loaning you money. The score is calculated by taking into account any and all debts, unpaid fines, utility bills and hire purchase agreements. It also can be improved over time by paying off debt consistently, paying bills and utility expenses promptly and making an effort to repay outstanding monies.
There are three credit check providers in NZ.
Equifax Illion (Who run Credit Simple) Centrix
Go to each site and request your credit score information. This process is simple but you will need a valid NZ I.D. and proof of address. . Once you have the report, check if the information is accurate. If anything is wrong, inform the provider and get it resolved promptly.
Now, you should have all the information you need to put together an application for a mortgage - and you can buy the house of your dreams!
To find out more about Home Buying & finances, download our FREE Guide today.