Budgeting your first home
It’s tough being a first home buyer. But with a bit of foresight and forward planning, we’ve got a few tips to help you make it work. First of all, first home buyers can still buy with a 10% deposit. However, banks can only do 10% of their new lending to those with less than a 20% deposit. Fortunately, all of the banks prioritise this towards first home buyers. Unfortunately, it’s also a competition, so the better you look on paper, the better your chance of getting approved. New builds are exempt from the Reserve Bank restrictions, so generally buying new is easier. This can be off-plan or on completion provided you buy directly from the builder.
Saving the deposit
Get stuck into Kiwisaver early. It’s the cornerstone of most deposits and the sooner you get started, the better. What I like is that it’s literally set and forget. You also get the added benefit of your employer contributing another 3%. If you can make it work, try tipping in 8% of your wages. Over 5 years you’ll save in excess of $40,000. If there’s two of you, then that’s an $80,000 deposit.
First Home Grant
There’s the additional benefit of a First Home Grant if you earn less than $85,000 as an individual and $130,000 as a couple, provided you are buying for less than $600,000 in Auckland for an existing property or $650,000 for a new property. The maximum grant is $10,000 for an existing dwelling ($5,000 per eligible borrower) and $20,000 for a new build.
Once the deposit is sorted, the biggest challenge with a mortgage is how much you can afford to repay each month. Student loan repayments make a big difference to affordability. The sooner you can clear it, the better. On a salary of $70,000 student loan repayments equate to $509 per month, or 11% of your after-tax income. This equates to the repayments on $80,000 of mortgage debt. If buying as a couple, and you both have student loans, you will be reducing your borrowing power by $160,000 or more. If we can, sometimes it makes sense to consolidate your student loan into the mortgage to free up cash flow. Especially if you’re not far from paying it off but value the cash flow benefit more than paying a bit of interest. Similarly, monthly expenses also impact on borrowing power, especially other forms of debt repayments. As a first home buyer avoid debt like the plague. For the most part, banks interpret it as living beyond your means. When you add it all up, debt repayments and other discretionary expenses can significantly reduce borrowing power.
Our top tips
Buying your lunch versus making it, combined with a coffee every day will cost you around $50,000 in borrowing power. That’s because $300 of loan repayments each month equates to $50,000 of borrowing power. It all adds up. Band together at work, and get the boss to buy a decent coffee machine. Cars also make a big difference. The total running cost of a car is roughly $800 per month including depreciation. In Auckland, the alternative would be a HOP unlimited bus and train pass for $200 and wham an additional $100,000 of borrowing power.
You can make it work
For a couple with a combined income of $140,000 (no kids) the maximum borrowing will be $600,000 with student loans and $760,000 without student loans. Buying a home for $700,000 with an $80,000 deposit and borrowing $620,000 is workable. Saving up for a house is tough. But owning and servicing the mortgage is equally tough. Even once you own a home, it won’t necessarily get easier. For many there will be the complication of having kids within a relatively short timeframe and dropping to one income. Then, just as it gets easier, you’ll want to upgrade the castle.