How and Why You Should Purchase Your First Home
Everyone wants their own space to call home sweet home no matter what phase in life they have reached. As technology advances and society evolves, our desires do change. For a young adult, it has become harder to own a home of their own. Hence it is far more attractive to rent. This coupled with the flexibility of moving allows both families and young adults to move at their own pace and not be anchored to one property or locality. However, the benefits of owning a home outweigh those of renting. This article will briefly illustrate the benefits of homeownership and explore the options available to purchase a first home in order to demonstrate how owning a property is not the end of the world but the beginning of a new adventure. The information in this article can be used as a guide to purchasing a first home and as an understanding of the current regulations in New Zealand as per the publication date.
For many in generation Y, exploring the world and finding new work opportunities is of top most importance, hence renting is the most viable option as it provides the flexibility to change their home base as and when required. For this group, purchasing a property and carrying the burden of a mortgage can be claustrophobic; making them feel landlocked and unable to leave home, because they need to chip away at the massive stone that is their mortgage. For some, renting will always be their number one choice and their life plan may be to purchase a home when they start a family or enter their mid-thirties. But, due to the rise in prices in major cities in New Zealand it will only get tougher and tougher to purchase a home like one they grew up in; a nice backyard to enjoy in the summer, spacious lounge, etc. The longer one prolongs the decision to act and start to look for a home in places where the prices are increasing, the more and more compromises one would have to make. The other benefit to purchasing a property earlier is the growth in equity one would see from holding onto a property. Usually, as a rule of thumb a property held for 10 years is likely to double in values, especially in Auckland. The journey to financial independence has begun the moment you have purchased your first home. With an asset to your name and a decent net worth you are progressing towards investing for your family, your future business venture and your retirement.
However, each person is different and as stated before you may have a different life plan. No matter what you choose to do, the earlier you start the better off you are. Of course, the mortgage on an owner’s shoulder is still a bother. But, with current interest rates and increases in rent, the divide between repayments and rent is shrinking. But of course, the career requires you the owner to move. What now? Well, there are always options. The property can become a rental subject to the bank’s lending policy. Usually you are required to live in the property for at least 6 months to a year, depending on the bank’s policy. Here the rent received should cover the mortgage repayments and at most you may need to pay a small amount from your pocket. Otherwise, you tough it out and pay the mortgage and rent. Sure, you are paying more for a tough period, but the reward will be grand. Building equity is like building a partnership or completing a project, there are many days filled with you doing the hard yards but you should keep moving and be confident. There is no shortcut to owning a home and no shortcut to becoming rich, there is a long and enduring process unless you have the Midas touch. Lastly, if all else fails, sell the property to a family member, if possible, or sell it to the public. There could be Capital Gains Tax depending on the period of ownership. But this is a last resort action as the long-term benefits of owning a property are lost.
To summarise, the crucial benefits of owning a property as stated is the ability to increase your equity, have an asset to your name, have a collateral to increase lending for an investment and not having to pay a higher rent when you could be paying a lower repayment.
For those who have read this far and want to get a head start, here are a few options to purchasing your first home.
Firstly, the Welcome Home Grant. All information for this option can be viewed on www.welcomehomeloan.co.nz, it is recommended you view this website after reading this article for further information regarding this option as it is subject to change. This is an option that the team at Loan Market Waitakere have advised for first home buyers. The following information has been presented on the website by Housing New Zealand (2016). Essentially, this option requires only a 10% deposit compared to the minimum 20% deposit for an owner-occupied property; a rental property cannot be bought through this option. The minimum criteria to qualify for a Welcome Home Grant are as follows:
• Maximum annual gross income is $85,000 as an individual applicant or a combined maximum of $130,000 for two or more applicants.
• All applicants must be a New Zealand citizen or be a permanent resident.
• A minimum deposit of 10%.
• Purchase price must not exceed the price cap for that region. Please see the website for the current house price caps.
• Application must also satisfy the lending criteria of the bank they have applied for. We will go through the lending criteria with you personally and with your permission go to the banks that best suits your position.
• Whilst the loan is active, you cannot own any other property. We complete an annual review and calculate your LVR to assess whether you can purchase a new home. At this point the existing loan will be discharged allowing you to own more than one property.
• A Lender’s Mortgage Insurance premium of 1% of the loan will need to be paid. This is for the bank’s risk in lending to an applicant who has provided a low deposit.
• You must live in the property you have purchased.
If you have been regularly contributing to your Kiwisaver for at least 3 years, some of the funds may be used for the deposit. The Home Start Grant is another facility that can help build your deposit. Depending on whether you are purchasing an existing home or building a new property, the Home Start Grant will vary. The grant favours applicants who are building a property, hence a higher grant value will be given. Similarly, the house price cap for the Welcome Home Grant also increases for those who are building a new property. For more information please visit the website and give us a call to discuss your options.
The next option is a more family orientated plan of action. If you don’t have the 20% deposit but you are able to afford the repayments, then you can purchase a property with a family member, such as your parents. If your parents own a property and are in a position to own another property, you can purchase your first home with them. The usual structure would be to purchase the home under your name and your parents’ name. The loan will be drawn on the new property and your parents’ property. Both you and your parents need to be able to manage the repayments and the lending bank will test separately. After 2-3 years the value of the property would have increased and, based on your income and other factors, you should reach a position where you alone can manage the mortgage. At this point the parents will sell their portion of the property and you will become the sole owner. With this option the property can be owner-occupied or rental, however in most cases it will be an owner-occupied property for at least 5 years in order to raise the equity. Remember, this is an investment in your future so naturally it will take time. This option is perfect for those with parents that own a property and are happy to carry the mortgage for the first few years. But, there is an option for parents or other family members to help, albeit they would have to very generous.
The generous option is one where your family gives you a gift as a deposit. A gift, for the context of this article, is a large sum of money that one person is giving to another person. Currently in New Zealand there is no tax on receiving a gift and therefore it is a great method to raise your deposit. In one case a client received $10,000 from their parents as gift, which was added to their existing deposit and allowed them to purchase a higher priced property. The bank will need a document declaring that the transfer of funds was a gift signed by the gift giver. It is important to note that an increase in deposit will allow one to ask for higher loan from the bank. This will result in a higher repayment which you will need to manage. Also, a gift is not a loan and you are not liable to pay back the gift. Generally, the clients we have worked with do return the gesture to their parents in their own manner. This option is perfect for those who are willing to gift money to their children. The next option is a far riskier venture but is still viable.
This option is for a family member to become a guarantor of the loan. The bank can accept a loan application if there is someone who can become a guarantor for the loan in the instance that you are unable to manage the loan. If you are unable to pay the repayments and cannot find any way of managing the debt, the guarantor will need to take the responsibility and the debt will become their issue. This is a very risky option for the guarantor as the bank can ask for their assets in order to pay off the loan should you not be in a position to do so yourself. If your parents are happy to act as guarantor they should understand that if anything should happen to you the debt becomes their responsibility. This option is not recommended as becoming a guarantor can also restrict that person from future lending. But, this is an option available to you. It is strongly advised that both you and the proposed guarantor get independent legal and financial advice before making any commitments.
To summarise, there are many benefits to owning a property that outweigh renting. This article gives you general information and for those who want to pursue their first purchase should read more articles and speak to a friendly financial adviser (free advice, no charge!). The options covered in this article have worked for many of our clients and we continue to advice new clients of their benefits and detriments before making any decision.
Purchasing your first home is an adventure you should enjoy. There will be highs and lows, days filled with hard yards and little or no rewards. There are no shortcuts to success, so keep your head high and build the foundation towards your financial future and achieve your dreams.
Housing New Zealand. (2016, October 14). Am I eligible. Retrieved from http://www.welcomehomeloan.co.nz/am-i-eligible/