Practical Advice For Buying Your First Home: Know Your Numbers

What To Keep In Mind When Buying Your First Home

This post is brought to you by Amanda Morrall, Simplicity’s Head Of Communications and Education.

Deciding to buy a house is a huge decision. Buying your first home will likely be the single most expensive asset you own. You want to get it right. That’s especially the case if you’re buying in a housing bubble and paying off that mortgage for the next three decades. Repayment periods and interest rates are crucial.

Buying your first home is highly emotional but it’s the cold hard facts that ought to drive the financials. The big question is, can you afford that house? Five years ago, when I wrote my first book on personal finance Money Matters: Get your life and $$$ Sorted, the average home in NZ was worth $400,000 and 5-10% deposits were still the norm.

Skyrocketing House Prices

Average house prices in NZ are now $646,807 (in Auckland it’s over $1 million) and deposit requirements have doubled. In an attempt to cool down our housing market, (deemed one of the most expensive in the world relative to incomes), the Reserve Bank reset loan to value ratios (LVRs) to 20% for owner-occupiers. It is higher for property investors. It’s debatable whether that dampened the market but there’s no question it made it harder to buy a home.

An LVR of 20% means that on a home of $1 million, a deposit of $200,000 is required. It’s no small job raising that kind of money, especially when average incomes in New Zealand are still only $49,000. The earlier you start saving, the better off you’ll be as you’ll have less to repay. KiwiSaver is a great savings tool for home buyers. More on that in future posts.

Remember, it’s not just the house you’ll be paying for. You will have rates, insurance, maintenance, utilities and other unexpected costs that need to be factored in. That’s on top of your other expenses, which don’t go away.

In determining your credit potential, bankers will factor all those things in and stress test your finances by assuming a higher interest rate than the one you’ve likely be approved for. They do this for their benefit and yours. They want to make sure you’ll be able to keep paying them back if circumstances change, for example, if interest rates go up.

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Do The Math

If you’ve got your heart set on buying your first home, it’s time to break out the calculator. Take the cost of the home you wish to buy, figure out the deposit that’s required and how much the loan will cost you. Figure out if you can comfortably make those mortgages payments, on top of your other expenses including food, petrol, insurances, clothing, travel etc.

The banks will look at your credit history, your pattern of bill repayments and any defaults. They’ll look at a minimum of three months’ worth of spending to establish how and what you spend your money on.

The Rule of 28%

Banks will lend you as much money as they can, provided they’re comfortable you won’t default on it. Whether that makes sense is another matter. Conventional personal finance wisdom suggests you shouldn’t spend more than 28% of your monthly income on housing.

Multiple your monthly income by 28, and divide it by 100. That’s 28% of your monthly income. That will help to determine how much you should borrow when buying your first home.

Step two: check out the mortgage rates on offer and crunch the numbers. Interest.co.nz has some excellent resources for comparing mortgage rates. It will also underscore the importance of having as high a deposit as possible, a competitive interest rate, and a fast repayment plan to reduce the total amount of interest you pay over the lifetime of your mortgage.

In subsequent posts, we’ll look more closely into mortgage rates, brokers, and KiwiSaver.

Amanda

Head of Communications and Education Simplicity KiwiSaver Classroom – Watch Videos To Learn More

Amanda’s book ‘Money Matters’ is available here on Kindle or Paperback

Disclaimer: This article is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.