How To Save A Deposit For Your First Home
Those first steps toward securing your first home can seem daunting. You may have a thousand questions surrounding the process and where to start. A common hurdle many find daunting is where to begin; how much is a deposit? What is a deposit? How do I save for a deposit?
The road to buying your first home is not as full of obstacles as you anticipate. By the time you reach the end of this article, you will be equipped with the tips and tricks necessary to navigate your first home buying process stress-free.
Saving for a deposit on a first home
The majority of first home buyers in NZ have spent a lot of time saving up for a deposit and other necessary payments such as lawyers’ fees. This financial preparation is a key part of the process, and you will thank yourself for having this discipline the more savings you can muster.
So, before you throw yourself headfirst into all the bank visits, mortgage pre-approvals and house-hunting, take a second to process how buying a house is a huge financial commitment and learn what your means are and how to work with them.
You can help yourself into a better financial position by reviewing your outgoing expenses each month or week, reducing any existing loan debt (some banks will only loan if you have less than $5k in debt including your credit card) and tracking your current spending. The most common wasteful spending habits Kiwis have are splurging on dining-out and beauty treatments or products. These can all be reduced to help save yourself a few bucks, and instead, put what you would’ve spent on the aforementioned toward your home deposit.
Getting a mortgage on a first home
Each bank has its own terms and conditions for loans, so the type of loan you receive is dependent on what bank you are with. Often, mortgages run for a length of thirty years, but again, this can differ depending on the agreement you make with your lender or bank.
The amount that you borrow will be broken down into smaller accounts that will be your mortgage repayments. These will often include interest, which can be subject to change, fixed or fluctuating (floating). There are numerous differing repayment structures that you will be able to choose from and it pays to get advice from someone you trust who knows the process or a professional like a mortgage broker.
To take out a mortgage, you will need to have a deposit, which will become your equity in the home. Equity is the difference between your home’s value and how much you have left on your mortgage. In other words, it is what you have ‘in the bricks and mortar’ of the property and it can be used to finance another.
How much deposit do first home buyers need?
Putting a 20% deposit on a home is often the safest bet, especially if you are of average financial position. For example, if the cost of the home you want to buy is $800,000, a 20% deposit will be $160,000. With a 20% deposit, you can access all the best rates and specials, so it’s a good number to aim for.
Those with stronger financial positioning can borrow with less. Some banks may accept a low deposit home loan in which case loanees can get approved with a 10% deposit.
Young first home buyers who are in a position to do so can rely on ‘the bank of mum and dad’ where mum and dad have equity in their home loan which can be used as the guarantee for your deposit. Parents can sign documents to legally guarantee whatever portion of the 20% deposit you may not have. Banks will still view this as the full 20% deposit and allow access to the same interest rates.
Additional costs to consider
It is also important when estimating your future homeowner budget costs, such as moving services, lawyer fees, new whiteware or furniture needed. Connection fees for power and internet. Costs that may be ongoing such as subscriptions. Mortgage repayments aren’t the only thing you’ll need to budget for in your life as a new home owner. On top of this, make sure to include insurance and council property rates in the final calculations. As your home will likely be your most valuable, treasured, and important asset, you will want to do whatever you can to protect it from the unpredictable.
When considering to buy your first home, be realistic with your needs and wants. For example, if you are part of a couple with no children, do you really need a 4 bedroom, 2 bathroom, 200sqm home? Choose something practical and affordable that will not break your income every month.
Also, to really ensure the ongoing security of your new home, investigate the land which it sits on. No one wants to move into a house and have the earth cave in beneath it or have a plumbing disaster under the house just waiting to erupt. A Land Information Memorandum (LIM) identifies any issues with the land the house is built on, such as drainage and landslip risks. Order a LIM through the local council, or your lawyer can do it for you. This could end up saving you so much money in the long run.
A builder’s report can also identify any possible problems with the house you’re looking at buying. An experienced builder will find things that the untrained eye will miss and may save you thousands, so it’s a good investment upfront for peace of mind.
You should now know that the main requirement of first home buying comes before the search for the ‘worst house on the best street’ and putting down that initial deposit. You need to do your research first. A critical mind is needed to plan so nothing becomes an expensive issue that could have been avoided with the proper precautions. If you see the good in everything too much, now would be the time to recruit a pessimist friend to help you identify everything that could go possibly wrong so that you may be ready when and if it does.
Putting that initial deposit down on your first home doesn’t have to be the whirlwind of overwhelming everyone tells you will be if you are prepared. If you have gotten this far, you should now know what mindset to have and actions to take to get you to that obstacle-free first home deposit!