How Hard Is It Buying Your First Home

Anyone In New Zealand that is looking at buying your first home will have noticed that it’s become a lot harder.

It’s always been hard enough to buy your first home, but the buyers in the market now have been hit in a number of ways and they’ve hit all at the same time too.

Let’s look at what is making things harder now.

Know The Key Issues

Like many things in life, you need to understand what the issues are before you can make a plan to overcome them.

When you are buying your first home then this is really important. It’s important because it is a big financial decision and your probably need to borrow more money than you ever have before.

Economic Uncertainty – we’ve been through one hell of a time with COVID both around the world and of course in New Zealand, and along with the health issues there have and will be some huge financial impacts too. Our country like many others has gone on a borrowing spree which concerns most economists as debt always needs to be repaid, and when debt is used to fund welfare there is no extra income generated to use for debt repayment. In addition the borrowing has fueled a mini boom and with that inflation, and that is a dangerous mix.

Housing Prices – against the backdrop of uncertainty the property market in New Zealand and around the world has been booming. The problem is that whenever there is a sharp increase in prices in property (but also in sharemarkets etc) then economists start to expect a correction which is effectively a drop in values. The banking sector are often pessimists and do modeling on what may happen if house prices fall, and in these models the risk sits with those people that have the lower deposits … generally the first home buyers.

Government Interventions – people have looked at Governments over the years to “fix” the housing crisis and the current lot fell into the trap at the 2017 General Election when they rolled out a flagship KiwiBuild housing policy with a promise to fix the housing crisis by building 100,000 new homes over 10-years. While it sounded good at the run-up to the election and probably won quite a few votes, it ended up a flop with reports that poor management meant it would take more than 400-years to hit the target. The Government have now introduced new tax rules for investors in the hope that it would “tilt the market” towards first home buyers… it hasn’t.

Interest Rates – with the Government borrowing and slashing cash around it has caused a mini boom in some sectors and along with offshore commodity prices and general product shortages and freight issues it has driven inflation. The Reserve Bank have the key role of managing inflation and the major tool they have is the Official Cash Rate (OCR) which they have started using. After long periods with a very low OCR we have started to see it increasing and that has driven nervousness in the banking sector and there is some concern that the housing market could stall or fall.

Banking & Financial Sector Reform – the financial sector in New Zealand has been going through major reforms over the past year. This was driven by a desire to protect the consumers and also make sure that the sector could withstand major disruptions like we saw with the Global Financial Crisis in 2007 – 2009 when banks around the world collapsed. While some may argue that reforms are needed, it has caused some major changes within the financial system and most of these have made it harder and more costly to borrow money. We are starting to see these reforms and they are hitting first home buyers quite hard with requirements around deposits and income in particular.

A Snapshot Of The Changes

There are lots of reasons for change as we have mentioned, but lets look at the effect to first home buyers.

Deposits – new rules have seen the banks having to halve the amount of low deposit (less than 20% deposit) lending that they can offer. While the banks can still technically offer loans to people with less than 20% deposit, they have almost all stopped all this at least for now while they get used to the new rules.

Interest Rates – they are increasing, but more importantly the banks are “testing” a borrowers affordability with a higher interest rate now, and they will probably increase those test rates more too. This means you need to be able to afford the mortgage repayments at a test rate of ‘say’ 6.50% where you would like to have a far lower actual interest rate.

Income – while lenders have always looked at income, the reforms mean they have to be more restrictive on what you can borrow based on your income with the introduction of debt to income ratios, but they are also looking beyond today to ensure that your income is sustainable.

Expenses – with the reforms the lenders have also started looking harder at expenses. Not only do they assess affordability based on income and inflated interest rates, they also are looking at expenses and potential future expenses.

Age – in the past most banks have accepted that people may not have their mortgages paid off before retirement, but there was always the option to downsize etc. The new reforms mean the lenders have to be tougher on this and generally factor in a maximum loan term to age 70-years. Combine a shorter loan term along with test interest rates and you might find that the loan is deemed no longer affordable.

When you look at these changes in combination it can change things quite a lot. The key is to open the right door and get a good mortgage adviser on your team to help you to plan and overcome any issues.

open the right door to buying your first home

Plan To Overcome These Issues

As we mentioned at the start, the aim is to understand what is causing the issue and formulate a plan to overcome them. The key will be to see where your finance application will be the weakest and then see what you can do to make your application better.

Give yourself the best chance at buying your first home – get a smarter start.

There will be some things that we have no control over, or what we may think we have no control over!

Looking at our snapshot we can consider these;

Deposits – we can all save more for our deposit and sometimes there are other things we can do too. If you are using Kiwisaver then you can review your provider to ensure that you have a good plan, and then review what you are contributing. You can have a look at what you may be able to sell and put the proceeds towards the deposit, and in some cases family may be able to help too even when you want to do this yourself.

Interest Rates – there is not a lot that you can do to change the interest rates, but you need to know that banks all have different ways to calculate things so even if one bank says you cannot afford the mortgage then another bank may be fine with you. There are also other non-bank lenders that sometimes will lend you the money when the banks don’t.

Income – so many people think they are doing the best they can, but often there are ways to make extra money and this can be the difference between getting a mortgage and being declined. Even an extra $200 a week will make a huge difference in many cases and it’s not hard to make that sort of money doing a side hustle, a part time job or by increasing the overtime etc.

Expenses – we can all review our expenses and manage our money better. Like extra income, shaving some money from expenses can help both in saving a bigger deposit and proving to the banks that you can afford the mortgage.

Age – you cannot do much about your ever-increasing age, but you can create a strategy to present to the bank for that point in time when you may be ready to retire and yet still have a mortgage. This does not have to be something that you commit to doing, but instead can be a plausible strategy that that gives the lender the ability to feel comfortable that you have a plan.

A good way to learn more about buying your first home is to speak to a mortgage adviser.

They should be able to review things with you now and know what the banks will think of as negatives so you can focus on these first.

Some advisers also have a good knowledge of non-bank lenders and can see if there is a way to use these to get into a home sooner. Often the nonbank lender may be a bit more expensive to start with, but if it means that you can get into a home sooner then it may be a very good option to at least consider.

The best part is most advisers will be happy to spend some time with you to help you get on the right pathways to home ownership, and they do not change for this.

It doesn’t mean that buying your first home will be easy, but it might be a little easier.