Building your house deposit – What you need to know
For first home buyers the idea of saving for a house deposit has always meant hard work. In Auckland saving a house deposit has become pretty much impossible for the average Joe Blo. But listen up, that doesn’t mean building a house deposit isn’t possible…
The tack has had to change, especially here in Auckland. Because that little lump of cash you’ve been setting aside for a mortgage deposit stretches nowhere – barely enough to pay the rates on a one-bedroom unit in the Bombays.
So, what does building a deposit mean?
Our recent experience shows that most first home buyers we work with use funds from multiple places to bankroll their mortgage. Whether you’ve built up quite a wad of cash for a home, or haven’t even saved a cent (…yet), here are the additional building blocks you can use to put together your first home deposit.
We’re pretty sure you’ll have heard of this one! I’d say 95% of my first home buyer customers use their KiwiSaver funds as part or all of the deposit for their new purchase.
If you’ve been contributing to KiwiSaver for three years or more, there are two options for using KiwiSaver in your deposit – the KiwiSaver Withdrawal and the KiwiSaver Homestart Grant. While every first home buyer has access to withdraw from their KiwiSaver, not everyone will have the option of using the KiwiSaver Homestart Grant as it has income and price caps.
A gift or personal loan
Wouldn’t that be lovely… some benevolent family member who sees your struggle and shares the love with you. It does happen, and reasonably regularly, as some parents don’t like the formality of being a guarantor and would rather just use their savings, if they have them.
A word of caution – do make sure you know whether you are receiving a gift or a loan! Ambiguity about the nature of the cash injection would definitely create some unfortunate conversations later!
If it is a loan, make sure you outline some terms on paper eg. interest rate, 10% loan so 10% value of the house in 5 years… however you want to structure it. If the agreement of terms causes a little angst, do think carefully about paying back the loan and whether the monetary relationship may just sour your real life relationship. No house is worth that.
Using a guarantor
The idea of using mum and dad to be guarantors is becoming more than popular, quite necessary, in fact! This works because parents allow enough equity in their home to act as a 20% deposit for a place for the kids – the kids borrow the lot, less any cash input they make to the deposit.
One of the problems with a parental guarantee is that the bank will put them through an affordability test even though they’re not going to be primarily responsible for paying the mortgage. Basically, the bank wants to know that the parents can cover the 20% portion of the mortgage, if for some reason the kids don’t, won’t or can’t. This means that from the bank’s perspective, the best guarantors are usually still working. So, what if your folks are retired and on the pension? Take a look at our last option…
Grab a mate (or a sibling)
Yep, that is an option. And one you do need to be careful about. But it’s a bloody good option, particularly if you’re single and can’t quite foot the deposit or income to service the mortgage.
This is not technically a ‘build your deposit’ strategy but it kind of serves the same purpose. If you can’t get the funds to work on a single income (and that’s pretty common nowadays), why not combine forces with a mate or sibling? Makes sense right?
I’ve seen several examples of people who earn around $65,000, have around $50,000 saved up in savings and KiwiSaver but can’t buy because they don’t have enough income to service a big enough mortgage to buy an Auckland priced property. The funny thing is, if you had a mate with exactly the same profile as you, then you’d have double the deposit and probably triple the grunt in terms of debt servicing. Now you’re talking…”
There are several key implications:
- The banks will run each of you through the mill in terms of financial checks. Essentially they look at each of you separately… BUT you’re borrowing less (half a house rather than a whole house) so passing the bank’s affordability test is easier for you.
- A ‘tenants in common’ approach to ownership is preferred (in my opinion) rather than the usual ‘joint tenancy’ situation, because it allows you to adjust the share each party has in the house. Importantly it allows you to match the percentage you own with the financial horsepower you’ve got.
- You can still use KiwiSaver money in this scenario as it’ll be your first house.
- You need a property sharing agreement to cover off such things as who pays what, the parent’s right to occupy the property too and what happens if one party dies, gets hitched or just wants out?
Probably the hardest part about this scenario is working out whether you want to be tied to a mate or sibling in contract (you need to know the person you’re getting into debt with well!). Don’t rush this – decisions like this take time. You’re better to get it right than race in without any solid advice behind you, and potentially ruin the relationship down the track. If you’re thinking about going down this track, definitely talk to a good mortgage adviser and get a smart solicitor onside.
There’s no better time to get organised.
Getting your deposit all sorted and good to go is one of the most helpful things you can do to get yourself over the line as a first home buyer. Banks remain pretty swamped with loan applications and even really strong applications are taking around a week to get looked at. Getting your head in the game early is a big stress saver – as is talking to mortgage adviser to bring all the pieces together.
It’s also worth noting that very few loan applicants arrive at our door in perfect condition – there is almost always some massaging of the numbers required, or wrinkles to iron out. Sorry to say, but it’s unlikely that you’ll be one of the perfect few! Getting it right is more important than doing it quickly, which is what we do very well (and at speed!).
So there you have it – if you want more info about getting your deposit and savings in order, give me a call any time.