7 ways KiwiSaver can help raise the deposit for your first home
There are several different ways you can raise the initial deposit to get your first property across the line now, Lifetime’s authorised financial adviser Julian Lingard says.
Saving for a house can feel like an insurmountable challenge. You’re making all the necessary sacrifices but your personal savings and KiwiSaver balance seem to be slowly increasing, all the while house prices continue to rise quickly.
Not to fear, there are options – starting with KiwiSaver and how it can be used to get you into your first home.
1. Put your KiwiSaver in the right fund
When New Zealanders sign up to KiwiSaver, we are automatically enrolled for the minimum contribution of three percent and given a default fund manager and fund type. This might not be suitable for you. One of the most important things to realise is that this is flexible – you can take control of your investment and decide which provider to hold it with.
For those looking to save for their first home we advise selecting a moderate or balanced fund, which delivers less return but is more reliable.
2. Start KiwiSaver young and invest big early
Start thinking about your KiwiSaver long before you decide to buy a house – these pivotal conversations need to happen as people leave university and/or enter the workforce, or even younger.
I would recommend investing eight percent of your income at this stage, as new contributors shouldn’t notice the missing money and it will make a huge difference when it comes to buying a house.
3. Ensure you make the minimum AND regular contributions
A lot of Kiwis are returning from overseas and looking to buy their first home using their KiwiSaver. Some are getting ‘caught out’ because they haven’t made what KiwiSaver calls regular contributions for a minimum of three years.
My advice to Kiwis heading overseas is to keep paying the regular contributions so that when you return the option is there. A minimum annual contribution of $1,042 is needed to receive the government tax credit contribution of $521 – that’s a 50 percent return on investment that you might not get elsewhere, and works out as a personal contribution of about $20 per week.
For those who are self-employed, we suggest you make the minimum contribution to receive the tax credit.
4. KiwiSaver plus HomeStart Grant
On top of your KiwiSaver withdrawal, which includes at least three years of contributions from your employer and the government, if your total household income is below $130k before tax, you’re entitled to Housing New Zealand’s HomeStart Grant. That can mean you’ll receive between $6k-$10k per person towards the purchase of a new property, or a $3k-$5k contribution to an existing property. The value is dependent on how long you have been contributing to KiwiSaver and the type of property.
5. KiwiSaver plus Welcome Home Loan
Government support in the form of a Welcome Home Loan can be comparatively more complex, but could be a valuable source for those who have a high income and only a minimum deposit available.
While having the regular income to service a home loan, borrowers might struggle to raise the initial funds for the 20 percent deposit the bank requires. For those who have decided that they want to get into the property market with a 10 percent deposit, Housing New Zealand can offer the option to guarantee a portion of the lending to the bank. This allows those with a smaller deposit to have a solid option by which to get on the property ladder without first needing to raise more capital.
However, this does come with a few disadvantages – often the interest rate is higher and there might also be the condition of paying extra on the loan by way of interest rate or through a low equity margin (LEM).
The Welcome Home Loan is a great option for those who are adamant they want to buy where they live and feel they are better off getting on the property ladder now, before the rapidly expanding market makes it too difficult to buy in the future.
"I would recommend investing eight percent of your income at this stage, as new contributors shouldn’t notice the missing money and it will make a huge difference when it comes to buying a house."
6. KiwiSaver plus Bank of Mum and Dad
There are several ways parents can contribute to the deposit for a house.
They can simply give first-time buyers a cash gift, but there’s not a lot of security around that option if they eventually want to be paid back by the child. Parents could also look at taking equity in their child’s home by supplying the deposit as an investment.
Alternatively, parents can help raise a deposit by supplementing a cash gift with the equity parents have in their existing home. Trading banks operate on an 80-20 rule for their loan-to-value ratios and, as long as the parents have more than 20 percent equity in their home, they can use that to underwrite their child’s mortgage.
Essentially the extra money for the deposit is being borrowed “against” the parent’s home. There is certainly more protection for the parents in this method and the first-time buyer will still be paying the whole mortgage. However, new buyers often have to pay off the 20 percent to the bank within five years, which can leave them cash-flow poor in the initial years.
7. KiwiSaver plus a combination of everything
I’ll use a specific example to demonstrate the way in which you can use multiple deposit-raising methods to get into a first home.
If buyers Tina and Tim want to buy an existing house, which is worth $400,000, with a 20 percent deposit, they would require $80k. The couple, who have both been contributing to KiwiSaver for three years, might have a joint income of $120k, meaning that they not only have their contributions (total of around $20k), but are eligible for the HomeStart Grant ($3k each) – this takes their deposit up to $26k.
Their parents are not in a position to borrow equity in their property, but can give a cash gift they have been saving of $14k. The couple now has a 10 percent deposit and decide to approach a bank that offers the Welcome Home Loan. The bank is happy the couple can service the loan and they meet Housing New Zealand’s criteria under the Welcome Home Loan scheme. Housing New Zealand essentially guarantees the additional 10 percent to give the bank the security they need to offer the Welcome Home Loan. The couple will need to pay a premium interest on that extra 10 percent (that tops them up to the 20 percent deposit) and decide to sit with an adviser to work out how to pay that chunk of their mortgage as quickly as possible.
Why should I use a broker?
No matter how you raise your deposit for a property, having a professional negotiate the deal with the bank on your behalf is the best option.
Financial advisers are governed to do the best for the client and leverage a better interest rate or deal, which they are often entitled to because of the volume of work they do with the lenders.
The majority of mortgage brokers are also free to use as the bank pays them a commission.
What if you already own a property but your partner doesn’t (or vice versa)?
KiwiSaver can still be used by the party whose first home it will be, either to buy their own property (as long as you intend to live in it for at least six months) or to buy into the existing property.
What happens after I buy my first home?
Post purchase, not only can you think about the best ways to service your mortgage, but you can also prepare your KiwiSaver for its next use – retirement – by considering the fund you want to have it in, and your continued contributions. We usually advise those looking to build their retirement fund in KiwiSaver, who have time to strategically invest, opt for high-growth funds.
Julian Lingard is an Authorised Financial Adviser at Lifetime.