Buying your first home in New Zealand with little to no savings might seem daunting, but it’s not impossible. It requires understanding available government schemes, exploring alternative lending options that focus on affordability, and being prepared to make compromises on location and property type. This guide breaks down the strategies, eligibility criteria, and practical steps to help you navigate this challenging but achievable goal.
Kāinga Ora: Helping Kiwis into Homes
Kāinga Ora – Homes and Communities is a government agency dedicated to making housing more accessible. They offer several schemes specifically designed to help first-home buyers with limited savings. The key is to understand which schemes you’re eligible for and how they can work together.
First Home Grant
The First Home Grant is a lump sum payment that eligible first-home buyers can use towards their deposit. For existing homes, you can receive up to $5,000 if you have been contributing to KiwiSaver for at least 3 years. If you’re buying a new build, you could be eligible for up to $10,000. Eligibility also hinges on income caps: before tax, it’s $95,000 or less for a single buyer, or $150,000 or less for two or more buyers. The actual amount you receive depends on how long you’ve contributed to KiwiSaver. For example, someone who has contributed for exactly 3 years would receive $2,000 for an existing home or $4,000 for a new build. You need to have a minimum 5% deposit to be eligible. The property price must also fall within the regional house price caps. These caps are adjusted periodically and vary depending on the region. Remember that you must live in the property as your principle place of residence for at least six months.
First Home Loan
The First Home Loan, underwritten by Kāinga Ora, allows eligible first-home buyers to purchase a home with as little as a 5% deposit. This is crucial when you have limited savings. This loan differs from the First Home Grant; you don’t need to be a KiwiSaver member to apply for the Loan. However, income caps and property price caps do apply. These are similar to the First Home Grant’s requirements. Check Kāinga Ora’s official website which maintains up-to-date information on eligibility criteria, including income thresholds. This loan is typically available through participating lenders, so shop around to compare interest rates and fees. A key aspect to preparing for a First Home Loan is showing that you can comfortably manage your repayments. Lenders will scrutinise your income, expenses, and overall financial situation.
Exploring Alternative Lending Options
Traditional banks might be hesitant to lend to first-home buyers with minimal deposits. Fortunately, alternative lending options exist, although they may come with higher interest rates and fees. It’s prudent to carefully weigh the pros and cons.
Non-Bank Lenders
Non-bank lenders often have more flexible lending criteria than traditional banks. They might be more willing to consider applicants with smaller deposits, but their interest rates can be significantly higher. Before committing to a non-bank lender, thoroughly research their reputation and compare their terms with those offered by other lenders. Ensure you understand all the associated fees and charges. Seek advice from a financial advisor to assess the long-term affordability of the loan. Sometimes, using a non-bank lender as a stepping stone to get on the property ladder can be a viable strategy if you have a clear plan to refinance with a traditional bank once you have built up more equity.
Family Assistance
While technically not a “lending” option, receiving financial assistance from family members is a common way for first-home buyers in New Zealand to bridge the deposit gap. This could take the form of a gift or a loan. If it’s a gift, ensure you have documentation confirming this for your lender (a statutory declaration is often sufficient). If it’s a loan, formalise the agreement with a written contract specifying the interest rate, repayment schedule, and other terms. This is for your protection and the protection of your family member.
Guarantor Loans
A guarantor loan involves a family member (typically a parent) using their property as security for your loan. This can reduce the lender’s risk and enable you to borrow with a smaller deposit. However, it’s a significant commitment for the guarantor, as they are liable for the loan if you default. Thoroughly discuss the implications with your family member and seek independent legal advice for both parties before entering into a guarantor loan agreement. Understand that if you default, your guarantor’s property could be at risk.
Understanding the Importance of Lender’s Mortgage Insurance (LMI)
Lender’s Mortgage Insurance (LMI) is a one-off, non-refundable insurance premium that protects the lender if you default on your loan. It’s typically required when you borrow more than 80% of the property’s value (i.e. have a deposit of less than 20%). LMI can add a significant cost to your mortgage, potentially thousands of dollars, and it is not money that you can recoup. The cost of LMI varies depending on the size of your loan and the size of your deposit. While paying LMI is unavoidable in many cases when buying with a small deposit, it’s crucial to factor this cost into your overall budget and to understand that it does not protect you as the borrower; it protects the lender.
Compromises and Strategic Property Investments
When buying with minimal savings, you’ll likely need to make compromises on your ideal property. This might involve considering smaller houses, apartments, or properties in less desirable locations. However, with strategic planning, these compromises can be stepping stones to your dream home.
Considering Location
Being flexible with location is essential. Look at up-and-coming suburbs or areas further away from city centers where property prices are more affordable. Consider the potential for future development in these areas, as this could increase property values over time. Factor in the cost of commuting, transport links, and local amenities when making your decision. A cheaper house further away might end up costing you more in transportation expenses.
Exploring Different Property Types
Think beyond the traditional standalone house. Apartments and townhouses are typically more affordable. Consider their Body Corporate fees and the rules that are in place. Look into unit titles versus cross-lease properties, understanding the implications of each. Unit titles generally give you more independence, while cross-lease properties involve shared ownership of land, which can sometimes lead to complications. Building inspections are paramount–uncovering hidden problems could add unexpected costs.
Rentvesting: A Potential Strategy
Rentvesting involves buying an investment property in an affordable area while continuing to rent where you want to live. This allows you to get on the property ladder without sacrificing your lifestyle. The rental income from the investment property can help cover your mortgage repayments. However, it’s crucial to carefully research potential rental yields and vacancy rates in the area you’re considering. There can be tax implications to holding an investment property, including rules around deductibility of mortgage interest, so it’s essential to get tax advice from a qualified professional. Negative gearing, where your expenses exceed your rental income, was a common strategy but current tax laws reduce the benefits of negative gearing.
The Importance of a Realistic Budget
Even with assistance schemes and alternative lending options, a realistic budget is paramount. This involves not only assessing your current income and expenses but also factoring in potential future changes, such as interest rate increases or unexpected repairs. Use online budget calculators to get a clear picture of your financial situation. Remember to include all costs associated with homeownership, such as rates, insurance, maintenance, and body corporate fees (if applicable).
Understanding Additional Costs
Beyond the deposit and mortgage repayments, several other costs are associated with buying a home. These include legal fees (for conveyancing), building inspection fees, valuation fees (required by the lender), and moving costs. Allow at least $3,000 – $5,000 for these expenses. Building inspection fees can range from $400 – $800 depending on the size and complexity of the property. Obtaining quotes from several professionals will help you budget accurately.
Negotiating the Purchase Price
Negotiating the purchase price is essential, especially if you have little wiggle room in your budget. Research comparable sales in the area to determine the fair market value of the property. Be prepared to walk away if the seller is unwilling to negotiate to a price you can afford. If you are purchasing via an auction, get professional advice before bidding. A registered valuer can assist.
Increasing Your Deposit
Even if you are aiming to buy with little savings, any additional funds you can save will make a significant difference. It will reduce the size of your mortgage, lower your LMI costs, and potentially improve your chances of getting approved for a loan.
Side Hustles and Income Boosters
Consider taking on a side hustle or part-time job to boost your savings. This could involve freelancing, driving for a ride-sharing service, or selling unwanted items online. Even a small increase in income can significantly accelerate your savings efforts. Be realistic and build this into your plans.
Reducing Expenses
Scrutinise your expenses and identify areas where you can cut back. This might involve reducing entertainment spending, cancelling unnecessary subscriptions, or finding cheaper alternatives for utilities. Every dollar saved is a dollar closer to your deposit goal. Challenge yourself to track where your money goes! It can be surprising.
Case Studies: Success Stories
Hearing real-life examples of people who have successfully bought their first home with little savings can be inspiring. Consider the following fictional, yet representative, case studies:
Case Study 1: The Apartment Dream
Sarah, a nurse, had a modest income and limited savings. She was eligible for the First Home Grant ($5,000) and secured a First Home Loan through a participating lender. She compromised on location and purchased a one-bedroom apartment in a developing suburb. Although she initially wanted a house with a garden, she realized that the apartment was a stepping stone to future property ownership.
Case Study 2: The Rentvestor
Mark, a teacher, wanted to live in a central city location but couldn’t afford to buy there. He decided to rentvest. He bought a small two-bedroom unit in a regional town and rented it out. The rental income covered most of his mortgage repayments, allowing him to continue renting in the city. He also used the First Home Grant to help. In his spare time, he would visit the unit to do some renovations. Mark got on the property ladder without changing his lifestyle. Always consult with legal experts familiar with property regulations.
Seeking Professional Advice
Navigating the complexities of the New Zealand property market can be overwhelming, especially for first-home buyers with limited savings. Seeking professional advice from a mortgage broker, financial advisor, and solicitor is highly recommended. A mortgage broker can help you compare loan options and navigate the application process. A financial advisor can help you develop a budget and savings plan. A solicitor can provide legal advice and ensure your interests are protected during the purchase process.
Navigating Risks and Protecting Your Investment
Purchasing with little savings comes with inherent risks, and it’s paramount to mitigate these as much as possible. Unexpected repairs can quickly derail your finances, especially when your budget is tight. Thorough building inspections are non-negotiable. Obtain a comprehensive report from a qualified building inspector before committing to a purchase. This report will identify any potential issues, such as structural problems, leaky building syndrome (often called leaky homes), or pest infestations. Addressing these issues upfront can save you significant costs in the long run. Budget for potential repairs, even if the building inspection comes back mostly clear. Put aside a contingency fund specifically for home maintenance.
Insurance Is Crucial
Comprehensive home and contents insurance is essential to protect your investment against damage from fire, natural disasters, or theft. Compare insurance policies and choose one that provides adequate coverage for your needs. Consider landlord insurance if you decide to rent out the property in the future, even temporarily. Earthquake cover is particularly important in New Zealand due to the country’s seismic activity. Take out income protection insurance: This can help you meet your mortgage repayments if you are unable to work due to illness or injury. Review your insurance policies annually to ensure they still meet your needs.
Long-Term Financial Planning
Buying a home is a long-term financial commitment, and it’s important to have a solid financial plan in place. This includes not only managing your mortgage repayments but also planning for future expenses such as renovations, education costs, and retirement. Ensure you have adequate KiwiSaver contributions to help with your retirement savings. Consider creating a separate savings account specifically for future home maintenance and repairs. Consult with a financial advisor to develop a comprehensive financial plan that aligns with your long-term goals.
FAQ Section
Q: What is the minimum deposit required to buy a house in New Zealand?
A: Generally, traditional banks require a 20% deposit. However, with the First Home Loan, you may be able to purchase with as little as a 5% deposit. Some non-bank lenders may consider even lower deposits, but these usually come with higher interest rates and fees.
Q: How do I qualify for the First Home Grant?
A: You need to be a KiwiSaver member for at least 3 years, meet the income caps (currently $95,000 for a single buyer and $150,000 for two or more buyers), and purchase a property within the regional house price caps. The amount you are eligible for varies with how long you’ve contributed to KiwiSaver, up to a maximum of $5,000 for existing homes and $10,000 for new builds.
Q: What are the regional house price caps for the First Home Grant?
A: Regional house price caps are updated periodically. Check the Kāinga Ora website for the most up-to-date information. As of late 2023, for Auckland, the house price cap is $875,000 for existing homes and $920,000 for new builds. These vary throughout regions of New Zealand. They generally reflect the average market values in specific areas.
Q: What is Lenders Mortgage Insurance (LMI), and how does it affect me?
A: LMI is a one-off insurance premium that protects the lender if you default on your loan. It’s typically required when you borrow more than 80% of the property’s value (i.e. have a deposit of less than 20%). LMI adds to the overall cost of your mortgage but allows you to purchase a home with a smaller deposit. It does not protect you, its only benefit is for the lender.
Q: Is it better to buy an existing home or a new build when buying with little savings?
A: New builds often qualify for higher First Home Grants and might be exempt from certain lending restrictions. However, they could also be more expensive than existing homes. Weigh the pros and cons based on your individual circumstances.
Q: Can I use my KiwiSaver to help with my deposit?
A: Yes, you can withdraw most of your KiwiSaver savings (excluding the initial $1,000 and any amounts transferred from Australian superannuation schemes) to help with your deposit, as long as you meet the eligibility criteria. The First Home Grant is on top of the KiwiSaver withdrawal!
References
Kāinga Ora – Homes and Communities Act 2018 and all related amendments and regulations.
Reserve Bank of New Zealand. Housing data and statistics.
Various lending institutions’ requirements for first home loans and LMI eligibility.
Buying your first home with little to no savings in New Zealand is achievable with careful planning, strategic decision-making, and a willingness to compromise. Stay informed about available schemes and lending options, create a realistic budget, and seek professional advice. Your dream of homeownership can become a reality. It all starts with taking the first step.
