Home, mortgage and
renovation finances eBook
Buying a home in New Zealand
One of the biggest financial decisions and long-term commitments you will ever make is buying your own home. It’s part of the Kiwi dream, owning our own quarter-acre3-bedrooms-and-picket-fence piece of suburban paradise. While more Kiwis opt for lifestyle choices such as inner-city apartments or semi-rural living, we all still strive to own our piece of Godzone.
Currently, the average house price in NZ is $650,000. Some districts are cheaper, such as the West Coast, which has a significantly more affordable average price of $210,000. The Auckland average is more than $1 million, making it the most expensive place to buy a home. The average Kiwi mortgage is around $390,000, and takes 25 years to repay. The average amount of interest paid on that mortgage over its lifetime is $370,000… So is it really worth buying your own home? In a word, yes. With increasing land prices, a competitive market with no real sign of easing, and a rental shortage with no end in sight, buying a home is a smart investment.
How much can you afford to spend on your new home?
When planning how much you can afford, there are two things to take into account: deposit, and how muyou can afford to pay on mortgage repayments.
How much money do you need for a deposit?
It varies from lender to lender and depends on the economic climate. Back before the global financial crisis, 10% deposits were common. These days, 20% is standard. If you have had KiwiSaver for more than three years, these savings can be used to buy your first home. You can take up to $10,000 for a deposit on the purchase of an existing home, or $20,000 if you are buying a new property.
How much money can you afford to repay on your mortgage each month? A lender needs to ensure the loan-taker can afford to service the loan. As a result, they won’t let you take out a mortgage that will take a high proportion of your income. They also may recommend other measures so you can pay off your mortgage faster, such as taking in a flatmate to help pay the bills. The average mortgage takes 33% of the household income, although in Auckland this rate is closer to 55%. Do a budget and ascertain how much you can afford to pay. If you have the ability to take in a boarder or flatmate, this can help pay off the mortgage faster, always a good thing. Paying off the mortgage faster makes a huge difference to the amount of interest you’ll end up paying. Particularly at the start of the loan, make an effort to pay off more than is required so you end up paying a lot less interest in the long run.
What does your mortgage cover?
When you think about a mortgage, you probably consider only the cost of the house. But remember the costs involved in buying and moving – lawyer’s fees, insurance, building reports, valuers, and the actual costs of moving.
Do you have everything you need in your home? If you’re moving to your first home, do you need to buy furniture? What about gardening equipment like lawnmowers? Rather than borrowing to the maximum limit and then not having any spare cash to buy what you need, maybe build a buffer amount into the mortgage to cover these expenses.’
Also, consider extending your mortgage and using as a debt consolidation loan. At present, a standard interest rate in NZ for a mortgage is 5-7% per annum. If you take credit cards and personal loans which sit at upwards of 20%, it makes sense to have a slightly increased mortgage and be paying a lot less interest. It also makes it a far simpler transaction to repay the loans, with one easy payment.
Also think about other future expenses that you know are coming up. A wedding? The impending arrival of a child? A holiday? Do you need car finance for a new reliable vehicle? Furthering your education? Now is the perfect time to assess your future finances and make some decisions. If you foresee you will need more money in the future, ask for it now. Be judicious in your requests and borrow the minimum possible, but asking in one request cuts back on fees.
How to get the right mortgage for you
Finding the right type of mortgage from the right provider doesn’t have to be painful. Here are the top three tips for finding a lender that’s right for you.
1. Choosing between Fixed or Variable
A fixed mortgage rate predicts that interest rates will rise, and locking in the lowest rate possible. A variable rate is good if it’s anticipated that rates will fall.
2. Negotiate with your lender
Most lenders will allow leeway for negotiations. Your position is stronger if you have a larger deposit and have other banking services with them, so try with your existing banking provider first.
3. Shop around to get the best deal
You want to compare:
- Interest rates
- Setup fees
- Any fees for early repayment/ early ending a fixed term
If this is all too much, consider a mortgage broker. It’s their job to know the market, the trends, and what the best fit for you and your circumstances is.
Once you’ve done a budget and figured out how much money you need, then use a loan calculator on the lender’s site. This will show you what an impact an extra 1% of interest makes, or what happens to your interest payments if you make a sustained effort to pay extra on your mortgage, particularly at the start of the loan.
Does your credit score affect your mortgage application?
Your credit score is definitely going to affect your loan application. Your score is a number between 1 and 1000, created based on your past borrowing and bill payment history. Any overdue utility bills, unpaid fines, or late loan and hire purchase repayments will decrease your score.
Before you apply for your mortgage, it is important that you check out your credit report. It’s possible that there could be incomplete or incorrect information on there. There are three credit check providers in NZ:
- Dun and Bradstreet
Go to all three sites and request your credit report. The process to request a credit report is simple but does require proof of address and valid ID such as NZ passport or drivers licence. Once you have the report, go through it and ascertain if the information is correct. If there is incorrect information, contact the provider and request it be removed.
Can you improve your credit score?
If your score is poor, your request for a mortgage may be declined. You can work to improve your credit score though (and while you do this, keep saving so that your deposit is larger, making you less of a risk).
Pay your electricity and internet bills on time. If you have hire purchases or loans, work hard to pay them on time (and pay them off completely). If you have debt on your credit cards, pay as much off as possible.
If you have to cut up your credit card to make this work, do it! If you can’t manage your credit card debt, do not have a credit card. Get a debit card instead.
If your credit check shows defaults which are genuine, set up payment plans with the company you owe the money to, as this shows good money management skills and a willingness to pay off debt. Avoid getting a lot of credit checks done as it looks like you’ve been applying for money at a lot of places, and getting denied.
Download our eBook ‘10 Ways to a Better Credit Rate’ to find out more about improving your credit score
What you need to know about buying and selling your home
If you are buying your first home and intend to live there for years, then you can skip this section. However if you are intending to rent out the property or renovate and sell, then there are two things you need to take into account.
Conditions on using KiwiSaver for deposit
You can only use your KiwiSaver as a deposit if you intend to use the home as your main residence and intend to live there for longer than six months from settlement/ completion of the home build.
The Bright-Line Test
In New Zealand, if you own a home and sell it within two years, you will have to pay tax on the money you make. However, if the home was your main residence or was given to you as part of an inheritance or estate, then you don’t have to pay tax. This test was developed to slow the property market and won’t affect people who intend to live in their house. However, if you do intend to sell it, this tax needs to be taken into account.
Are you planning on renovating? Are you wanting to increase the value of your home, or simply creating a better living environment for you and your family? The reason why you’re renovating will affect what you focus your energies and money on.
DIY your home improvements or pay someone else?
"DIY… It’s in our DNA"
While most Kiwis think they are capable of slapping a bit of paint on a wall or knocking up some shelves, the reality is often quite different. While we all know what a stud is and the potential for Dad jokes walking around with a stud finder pointed at yourself, the ability to successfully install a shelf is actually a different skill.
When should you attempt DIY?
Here’s a simple checklist for when you should attempt DIY:
1. When you have some actual skills and think you can complete a task to a reasonable standard.
2. When you have time up your sleeve.
3. When the outcome does not need sign off from authorities (i.e. building inspector, electrical work).
4. When it’s not plumbing (water will find a way from every tiny gap and can cause huge damage).
5. If you don’t mind living in a half-completed war-zone.
DIY is sometimes not as much of a money-saver as you think. The professionals will spend less on raw materials, take less time, and will save having to re-do it by doing the home improvements right the first time. Sometimes, it’s worth investing in the pros, at least for some tasks.
How to get the best bang for your renovation buck
There are some renovations that won’t result in a corresponding increase in a house sell price. You need to be able to afford to renovate – have you got savings put aside for this or were you planning a personal loan? If you are doing up a home with the intention of selling, then there are certain areas you should focus on to increase your sale price the most.
Painting is always worth it. A fresh coat of paint provides an instant lift and tidies up worn homes. In NZ, for the highest resale values, keep the colour palette neutral and consistent throughout the house.
Tidying up the front entrance to the house increases the street appeal, which instantly adds value to the sale price. Weed and sculpt the garden, a fresh coat of paint on the fence and front door, even replacing a battered mailbox helps.
Kitchens and bathrooms are a pain to renovate and as a result, many people don’t want to do it themselves. While they can be expensive and prone to budget blow-outs, removing a dated and worn kitchen will make the house much easier to sell. Replacing an old mouldy bathroom can help sell the home faster too.
The addition of a deck is not worth it. Many decks require compliance and inspections by building inspectors and following through the building consent process. They also need a considerable investment that does not pay off in increased sale price.
A new fire, heatpump, or HRV system may also not result in an increased sale price. While there are minimum requirements for insulation being introduced in 2019, any extra insulation may not be appreciated by the buyer.
Next adulting steps after buying a home
Buying a house is a great step, and this is such an exciting time in your life. There are often lots of other things going on... Often this is the time you might consider marriage, or having a child. How can you plan for these steps?
Is your next step wedding planning?
For some women, their wedding is a culmination of years of dreaming, scheming, and wanting their once-in-a-lifetime fairy-tale wedding. Stereotypically, men tend to view weddings as a thing they have to do and are less inclined to spend big bucks on it. After all, it’s only one day, right?
Whatever you and your spouse-to-be view the wedding as, you have to start off your married life as your will continue – with compromise.
Who will pay for your wedding?
Traditionally, parents pay for the wedding but as couples now have lives together for (often many) years before marriage, it’s become the norm for the bride and groom to pay. Ask your parents though as they may want to contribute a little. Be aware this means sometimes the guest list does end up with extended family or friends of your parents that you wouldn’t otherwise invite.
If one partner wants a budget blow-out with dancing unicorns and a ten layer cake while the other wants a backyard celebrant and BBQ catering, you’re going to have a problem. Don’t worry though; compromise is the start of a successful marriage.
Set a wedding planning budget that you are both prepared to stick to. Think about which three things are most important to you, and prioritise these. If he has his heart set on Batmobile driving him to the ceremony and she wants a Vera Wang dress, somewhere along the way you may have to economise though.
Set that wedding budget
Now that you’ve talked about what kind of wedding you want and have decided on a figure, allocate it at a smaller level. Consider what the following things will cost:
Saving money on your wedding
There’s a bunch of stuff you can do that saves you money, while still having a classy wedding.
For instance, a big way to save money is to have an out-of-season wedding. Not only does this mean you may get cheaper rates, but also means the suppliers you want will be available. Besides, weddings with golden autumn leaves or sparkling white snow are stunning.
No-one remembers the wedding favours. If they are food, they’ll get eaten on the day or forgotten. If it’s something more lasting, it’s amazing how many people leave theirs at the venue or dispose of it later. Think of this as being better for the environment too… less waste.
‘An all-in-one, purpose-built venue is often cheaper than a piece-by-piece wedding.’
Despite it often not looking like a budget option, an all-in-one, purpose-built venue is often cheaper than a piece-by-piece wedding. While the initial cost may seem higher, by the time you factor in hire of a marquee, furniture, dinnerware, caterers, a sound system, and anything else (not to mention the extra organisation and stress), it may end up cheaper to go for the all-in-one option.
If you were thinking of a destination wedding, this can be a great option for a small wedding – while being on honeymoon at the same time! Just be aware that the cost of travel will mean some people will be unable to attend.
Or are you planning on starting your family?
Children don’t come cheap!
If your intention is to create a family, there is even more to consider. More than choosing names and decorating the nursery, there are some big financial factors to take into account.
Follow these six steps to plan for the arrival of a baby
1. Take stock of your finances
You should have done this already when looking for a house, so you should understand – can your budget withstand extra pressure? Do you have savings? Also, are you planning that one of you will take time off work? How will the budget look with one income?
2. Check out parental leave options
The New Zealand Government offers 22 weeks of paid parental leave. This is paid out at a rate of a maximum of $538.55 a week, which has taxes, KiwiSaver, and student loan repayments taken from it.
This leave is dependent on the person having worked for at least ten hours a week, for 26 weeks of the last year.
After the baby arrives and the 22 weeks is over what is next? Do you go back to work, putting your child in day care? At $7 an hour on average, this can cost round $300 a week – is it worth it for you?
The Government also has the Best Start tax credit of $60 a week, and Working For Families assistance. These may help you to be financially stable while the baby is growing.
3. Babies are expensive
The average baby costs about $15,000 in the first year of their life. There are many options to make this a bit cheaper, such as buying second hand baby apparel or taking hand-me-downs from other family members.
What else do you want or need? Are you considering buying a family car? Perhaps when buying your home, you increase the mortgage to cover the cost of a new, reliable car.
4. Health and Life insurance
Do you have health and life insurance for yourself? Will you want it for your baby? And what about the cost of re-writing wills? You want to have your child added to the will, as well as future wishes for their care in the event you are no longer here.
5. Create a budget for your future lifestyle
You are going to be subject to increased costs and reduced income. What does this look like? Can you realistically live like this? Are you still saving for retirement? Do you still have savings in your emergency fund? Babies cost around $15,000 in the first year, and $12,000 each year after that. Education costs like uniforms and school trips, hobbies and sports groups, increased holiday costs… it all adds up. How does that fit into your budget?
Savings are super important
While it may seem counterintuitive to be talking about saving money when you are facing some big (expensive) events, do not neglect your savings! You absolutely must have rainy day savings. If you don’t have a savings account, then now is the time to start. Even a small amount will quickly add up with regular deposits.
This savings account is for those expenses that happen when you least expect them; a major car repair, an injury that means you can’t work, a substantial medical event. The experts recommend having two to six months of savings tucked away in case of worst case scenario.
Retirement and KiwiSaver
Throughout this process, it may be tempting to take contributions holiday from your KiwiSaver or stop regular payments towards your retirement scheme.
Don’t. Continue making payments to your funds, even if it is just the minimum 3%. This ensures you get the Government top up each year as well as maximum employer contributions. This is likely the only free money you will ever get, take advantage of it!
This is a good time to take stock of your KiwiSaver though, even if you aren’t using it for your house deposit.
Check your KiwiSaver
There are a number of things to look into when checking your KiwiSaver account. Log in to your provider and look at the following things.
1. Is your fund making money?
If not, look at why. Are you on the low-risk investment scheme? Unless you are nearing retirement, you should consider medium or high risk investments. High risk investments offer the greatest returns but also potentially the greatest losses. Medium risk offers a balance range of investment types and stable returns.
2. What fees are you being charged?
Fees are important as you are paying your fund manager to assess your investments and make you the most money. However check that it’s not costing you more than it should. If you think it’s excessive, you can change providers.
3. What are you investing in?
Four of the nine default providers invest in landmines, guns, tobacco, and other less ethical investments. If this is important to you, change providers to an ethical investment company. If this is not of concern to you, note that ethical investments typically have higher returns.
4. How much money are you making, saving at your current rate?
Is this enough to comfortably retire? Most fund providers offer calculators to check what happens if you increase your contributions.
5. Ensure you are receiving your $524 government contributions each year and employer contributions.
If you are making at least the minimum contributions on a salary of $30,000+, then you are receiving the maximum contributions from the government already.
Your retirement savings are part of your future, don’t neglect them now.
Key points to keep your finances in the black
Throughout all of your life, there are a few good, sensible things to do consistently. Done together, they will help keep your finances healthy.
Regularly assess your finances
Set up a budget and understand where your money is going. It can be scary, but it’s important to do.
Have two savings accounts
Your KiwiSaver or retirement funds should be tucked away and not touched. Small amounts over a long term add up. Your ‘emergency funds’ account should have been two and six months of income in order to cover unexpected expenses.
Don’t get into debt
If you do, get yourself out of it as fast as you can. This affects your credit rating which can have significant impact on your long term goals.
All debt is not created equal
Credit cards have a high rate of interest. If you have an opportunity to exchange to a lower rate, do so.