First Home Deposits - HOW!?
The majority of first home deposits will be required by the bank to be within the 10% - 20% range. Banks encourage of course the 20% threshold but do offer low deposit home loans down to 5% to those with strong servicing ability – however expect to be charged an extra piece of interest for this.
There are several ways that one can put together a deposit for a home. I have listed some of the best ways below but also delved into some that are perhaps less well known.
The most obvious and most popular way of bringing together the first deposit on our first home. This coupled with the second method, Kiwisaver, is not the quickest way to form a deposit but it is the most common used by Kiwi’s. The current downside of this is just how slow it is to accumulate interest. At some stage in school most Kiwis are taught the benefit of ‘compounding interest’ or interest on interest. However current savings rates range between 0.25% and 0.75% in a regular savings account, or around 1.20% for a longer term deposit. Saving $10,000 in one year would give you a return of $25 - $120. I think I would rather watch paint dry.
Kiwisaver was introduced by the Labour government in 2007 as a way of preparing Kiwi’s for retirement. As well as this however, all Kiwisaver funds, excluding the government’s $1000 kick-start, can be withdrawn for the purchase of one’s first home. Depending on what category we choose to invest in, Kiwisaver is effectively invested into the share market on three out of the four categories. Isn’t it ironic how investors in New Zealand are chastised by some media or other Kiwi’s, but yet 2.8 million of us are actually all investors just by having a Kiwisaver account. Funny what some people turn a blind eye to. The compounding effect of Kiwisaver provides thousands of Kiwi’s with quite substantial deposits over time.
- Over five years based on the median NZ income - $57,512
- Median NZ income increasing 2% each year.
- 3% contributions by you.
- 3% contributions matched by employer.
- Kiwisaver fund returning 5% per year.
Year 1: $3,450 Year 2: $7,142 Year 3: $11,089 Year 4: $15,305 Year 5: $19,805
By ten years, this would have accumulated to over $49,000. This doesn’t take into account the tax credit of $521 that the government gives each year.
I always say to younger family, get into Kiwisaver and put more of your savings into that account as soon as possible, it offers a much better return and free government credits.
$49,000 doesn’t sound enough for a deposit, but potentially you may purchase that first home with your wife or partner!
3) Government help – free money!
The New Zealand government provides a free grant to all first home buyers who meet certain conditions, of up to $5000 for an existing home & or up to $10,000 for a new built home. The conditions are:
- Must have been in Kiwisaver for at least three years.
- Earn less than $85,000 for an individual and $130,000 for two or more buyers
- Not currently own any portion of property.
- Meet the price caps in the region.
- Live in the home for at least 6 months.
This can be combined with your Kiwisaver withdrawal
4) Housing New Zealand help – low deposit.
This carries the same conditions as above, but allows you to apply for a Kainga Ora (Housing New Zealand) First Home Loan with a 5% deposit. Certain banks allow this programme and as long as you meet the above eligibility, as well as the servicing test for the bank of course, then you can have a 5% deposit to purchase your first home.
This is an absolute fantastic programme for low – median income earners. People shouldn’t see this as a handout, it is one of the many levers that the government pulls to try to get as many people into their own home.
Those are the four usual ways of New Zealander’s getting into their own homes and you may have used them or be planning to.
HAVE YOU CONSIDERED THE FOLLOWING THOUGH?
5) Live on less.
When a recession hits, most people are inclined to do one of two things to get through the tough times:
- Work, earn and save more.
- Cut spending.
But why do we only do these things when times get tough? We will leave human psychology for another day, but really there is no reason why we can’t do these things earlier.
Here’s some easy ideas of how to save:
- One less café coffee a day = $2,007 per year.
- Only one Lotto ticket per week instead of two = $1,040 per year.
- One less takeaways meal per week = $1,040 per year.
Why do I say these ones – well I am notoriously bad for the above ones and regret being that way! Do as I say, not as I do!
6) Bank of Mum & Dad.
The bank of Mum & Dad is becoming more common, particularly in expensive cities such as Auckland, Hamilton and Wellington with family members combining resources to create a deposit. However the banks take a hard line on combined deposits with multiple names on the mortgage, it is very difficult.
The better approach is to have Mum & Dad lend us some of the equity from their home. What do I mean by that?
A lot of Mum & Dads to 20 – 40 year olds have owned their own home for a few decades and have either paid off the entire mortgage or built up substantial equity in their own home.
This can effectively be gifted to their children or used as security on their children’s mortgage at no extra cost to them. Once the children pay off that portion off their mortgage, the security is released.
Thanks Mum & Dad!
I’ve thrown this in here for an extra oddball method. I highly recommend Sharesies as a way to learn & participate in share market investing. It is also great for children as a kids account can be opened and for less than $1 anyone can invest in companies from around the world. It has ETF funds which are funds that comprise multiple companies in one, offering more diversity and safety for your portfolio.
So why mention it here?
If you don’t want to add extra savings to your Kiwisaver which locks in that money until you apply to withdrawal it, and you would rather have easy access to your money or be able to be more hands on, then Sharesies is the perfect platform to use as an effective savings account.
So who can give advice or help me pull it all together?
This can be the tricky part for most of us, working through all the options and bringing them together to create a deposit.
In my experience, dealing with the bank at a local branch in town is extremely tiring. You are dealing with someone who at the end of the whole process doesn’t actually make the decision as to whether or not you get a mortgage.
My strong advice is to use a mortgage broker. 95% of the time they are free to use (they are paid by the bank) and can provide a strategy for forming your deposit and complete mortgage application, as well as negotiating interest rates, cashbacks and terms with the bank for you.
I have a very good broker based in Queenstown who I swear by – Roost Mortgages and I leave the whole process to them. It takes the stress off you to focus on the rest of your life and actually meeting the strategy that is set out if you require more of a deposit.
Look up brokers in your area simply through google and check out their reviews to find a suitable one.
If you have any questions at all on deposits, head to my website and fill out a contact form with your question/s. >>> www.tobypascoeproperty.co.nz