How to save for your first home
Pulling together a 20 per cent deposit for your first home is daunting, but not impossible. Here are some tips to get you going.
Get a plan - and make it realistic
What kind of property are you saving for, and where? Do some research and work out how much this is likely to cost and what your mortgage repayments, as well as insurance and rates, will be.
Damien Leng, head of savings and transactions at ASB, suggests using these projections to set your savings goals.
Once you've got an idea of what your fortnightly outgoings might be as a homeowner, deduct whatever you're paying in rent from that amount and see if you can save the rest, perhaps even downsizing your rental for a while to reduce your rental outgoings.
"From a bank's point of view, if you're putting away $600 a fortnight on rent and another $400 in savings and you've committed to that behaviour... when you tell them you want to take x amount of borrowing and can commit to $1000 a fortnight in repayments, it's a really easy conversation to have," says Leng.
Start saving and stay committed
Once you've worked out how much you want to save, set up a savings account. There are accounts that offer incentives if you don't make any withdrawals, so look around for the best deals.
Once you get your mortgage you won't be able to just opt out of paying it, so try to treat your savings with the same dedication.
"Saving for a deposit is not something you do by just opening an account and throwing some money in when you can," says Leng. "People need to be absolutely committed."
Automatic payments (APs) are a great way to stay on track. Leng suggests setting up a savings AP on payday - that way you're not just putting away whatever's left over at the end of the month.
Don't forget KiwiSaver
There are a couple of ways to use KiwiSaver to help you into your first home. If you've been in KiwiSaver for at least three years you might be able to withdraw some of your savings to go towards it. Depending on your income and how much you spend on a house, you might also be eligible for a deposit subsidy.
The Reserve Bank's loan to value ratio (LVR) restrictions mean most borrowers must have a deposit of at least 20 per cent. However, if saving that much seems like an impossible dream, there are a couple of ways around it.
The LVR restrictions don't apply to new builds, so you could consider a new build as an option.
Banks also have the ability to allow some borrowers to have a smaller than 20 per cent deposit when buying an existing home.
Leng says a bank has the leeway to offer up to a small portion of the value of its loans to borrowers with a lower deposit - but if you want to be one of the chosen few, then you have to be able to show you've made a significant effort to save.
"A customer who has shown committed savings behaviour, such as setting up APs, and who has demonstrated they can budget around quite significant outgoings every month - even if those outgoings are into a savings account - is the sort of customer who will be viewed favourably."
Leng also suggests building a relationship with your bank. Go in and talk to a banker about what you're trying to achieve, and see if they can work with you on a savings strategy.
"If you've maintained a relationship with a banker and you see a house, and you've only managed to save say, 15 per cent, we would encourage you to come in and have a chat. You never know unless you ask."
Don't pin your hopes on ducking in under the threshold though. You might have done everything right, except timing. If a bank has reached its quota of loans it's allowed to extend under the threshold, it won't be able to approve your loan because its licence is at stake if it breaches the Reserve Bank's limits.
"Customers shouldn't be afraid to ask, but there may be situations where we're not in a position to do it at that time."
- Set up an automatic payment to a high interest savings account and don't be tempted to dip into it.
- Explore whether the KiwiSaver subsidy and withdrawals are options for you.
- Build a relationship with your bank - show them you're a committed saver and a good risk.
- Don't be afraid to ask if you could qualify for a lower deposit, but don't pin your hopes on it.
Click here to find out more about getting a home loan with ASB.