How millennials can overcome barriers to getting into their first home
According to the Financial Services Council, millennials have been dubbed “Generation KiwiSaver,” largely because this scheme is likely to constitute their only savings for buying their first home. Although it’s designed primarily for retirement savings, approximately 95 per cent of first-time home buyers I see are unable to buy home without their KiwiSaver funds.
But, the good news is first-time home buyers are steadily returning to the housing market. They account for 24 per cent1, or one in four, of home owners – the highest rate New Zealand has seen since the global financial crisis in 2006 and 20072.
While home ownership may not appeal to everyone, it is not out of reach for those who are truly committed to achieving this financial goal. If you want to get off the rental treadmill and into your first home, here are eight factors you need to consider.
Barrier #1: Raising your deposit
The New Zealand Reserve Bank’s loan-to-value restrictions means that first-time home buyers need to save for a 20 per cent deposit to get onto the property ladder.
The exception to this rule relates to new builds – however, the decision to reduce the deposit required lies at a bank’s discretion. Under the Reserve Bank’s guidelines, you can buy a new build with a five per cent deposit. However, the likelihood of this is slim as it would require a candidate with an exceptional financial standing for banks to consider it.
Approximately 15 per cent of a bank’s books – or their lending capacity – is allocated to first-time home buyers, and banks are looking for the best customers to fill that space.
Factors such as debt, defaulting on credit (for the last four to five years) and part-time employment could be placing you at a disadvantage when securing a home loan. While banks generally look at an applicant’s last three months of bank statements to track their spending habits, it’s the management of your overdraft facility that impacts your ability to borrow.
Overdrawn banks accounts, even if you have savings in another bank account, serve as a red flag to banks – especially if it’s happening often. Speak to your bank if you’re keen to look at removing this facility in order to avoid going into overdraft.
Barrier #2: Added auction-related costs
Attending property auctions may seem like a good way to score a bargain property below its rateable value, but it’s important to factor in the possible additional costs associated with undertaking the due diligence required when bidding at an auction.
Before even getting to an auction, the total financial outlay can add up to a considerable amount: a registered evaluation may cost between $600 and $800, a building report around $500, and then there are legal fees to consider. So if you were doing due diligence on three properties before you are successful with a bid, you can expect to outlay approximately $4,500 in auction-related fees alone.
Consider looking at priced property for sale instead if your budget doesn’t stretch to paying for required due diligence for homes on auction. However, while there are costs associated with attending the auction with the intent to bid, you can still go along and if it is passed in then make a conditional offer to allow you to investigate the home further.
Barrier #3: Dealing with the impact of your debt
As much as millennials are KiwiSaver-reliant, so too are they reliant on credit. From a car to a couch or coffee machine, retailers have made it all too easy and convenient to place purchases on credit or hire purchase. When buying your first home, the true cost of debt or available credit is its negative impact on your ability to borrow.
In practical terms, a monthly repayment of $250 on hire purchase may reduce your home loan lending total by $50,000. A credit card limit of $10,000 (whether used or not) can potentially reduce your home loan lending by $25,000. Banks look at your total indebtedness when assessing your suitability for a home loan, and this includes any available credit.
It’s important to remember that you have total control on the credit available to you, and you can ask your bank to reduce your credit card’s limit. Before you apply for a home loan, you may want to consider evaluating any available credit and outstanding debt you already have, and reduce this as much as you can.
Barrier #4: Securing a home loan on a single income
Given rising house prices, securing a home loan on a single salary may prove to be problematic. For example, if you’re single or divorced and have a child, you may find the banks unable to provide a sufficient lending to purchase a home or apartment. Banks take into account all additional expenses associated with having a child – such as aftercare, additional living costs, and so on – and this can affect the total lending available to you.
If you’re on a single income, remain open to alternative or flexible solutions. For example, you could make an arrangement with your parents or look into buying your first home together with your sibling or a friend.
Barrier #5: “Helpful” advice from friends and family
As New Zealanders, we love helping our friends and family – especially when it comes to assisting them achieve the Kiwi dream of owning their own home. However, as first-time home buyers, it’s vital to evaluate the input we’re receiving from others, as this advice may be dated or lack tried-and-tested experience.
Relying on the advice of industry professionals can go a long way to help you navigate the home loan process. For example, if you’re looking to purchase a home which has an unconsented bathroom, a home loan adviser is best placed to help you understand on the banking, insurance and legal ramifications of doing so. They’re best equipped to deal with your queries and assist in making a safe investment.
Barrier #6: Being unclear about your needs
One of the more common mistakes I see first-time home buyers make relates to “paralysis by analysis”. Unsure of what they truly want from their first home, some people are unable to make a purchasing decision and take 12 months longer than they expected to get into their first home. In that time, the market has moved on and they end up buying at a higher cost.
It’s important to be take the time to work out what you want from your first home: are you planning to have children and want a three bedroom home in a good school catchment area, or are you looking for an investment property with a better rental appraisal? In certain, rare instances, a home may tick both boxes, but you’re likely to find it ticks neither box particularly well.
Invest in working out how you want your first home to serve you; it’s easier to be more decisive when you’re know what you’re looking for.
As buying a home can cost anywhere from close to a half a million up to $700,000, consider both the positives and negatives of every property you shortlist. Put in the time to do ample due diligence and ensure the property meets all your requirements.
Barrier #7: Getting a home loan approval
There’s often a large discrepancy in home loan approvals from bank to bank: the same first-time home buyer can apply for the same loan with multiple banks and get a range of responses, with a lending difference as much as $70,000.
Don’t get discouraged if you are declined on your first application. Never rely on one bank, as the lending criteria can vary dramatically. Each bank undertakes its own assessment and may have a different way it rates factors such as overtime earned, the Government’s Families Package rebates, child support, casual contracts, and employment trial periods.
Financial advisers, who are non-bank affiliated work with a wide range of banks and home loans products, and therefore are in the best position to provide you with advice that best suits your personal situation and goals for the future.
Barrier #8: Living beyond your means
Let’s be clear, millennials: banks don’t mind how many smashed avocado on toasts you’re ordering at cafes each week – they care about your understanding of budgeting and good money habits. When applying for a mortgage, they’re looking for evidence that you’re able to live within your means and pay back their loan. For example, if you’re earning $100,000 a year and have no emergency savings fund to pay for unexpected expenses, this does not demonstrate good money management.
While KiwiSaver is an important saving vehicle for retirement, it doesn’t replace emergency savings that may help you in times of hardship. Consider putting smaller financial goals in place to pad yourself over your home loan period, as you still need savings outside of buying a home to protect your financial standing.
Doing so may mean making lifestyle and financial sacrifices. For example, increasing your savings may mean less eating out or other treats. Be realistic about your needs, and buy what you can afford rather than what you want.
I have worked with clients with household incomes of $60,000 and $500,000, both of whom have successfully built assets. What’s interesting to note is that it’s not income that determines your financial success, but rather what you choose to do with money.
Josh Martin is a Lifetime mortgage adviser with a real passion for property. Based in Tauranga, he is committed to helping first-time home buyers understand the process of buying their own home.
1. Corelogic August 2018 data.