First Home Buyer Guide
A comprehensive guide to everything you need to know to be a first home buyer
The rules and regulations for buying a home are constantly changing, but this information was accurate at the time of writing. I recommend that you not act on any information in this guide without first consulting a lending specialist.
If at any stage while reading the guide you need clarification, please feel free to contact me using my contact details at the bottom of the page or the 'Book at Consultation' button at the top of the page.
Everything you need to know to get started
The two main factors that determine how much you’ll qualify to borrow are your deposit and your income.
You generally require at least a 10% deposit, although there are times when you can buy with 5% (Kainga Ora, Guarantors, etc). A 20% deposit is typically required for a Pre-Approval, but it is not necessary to obtain a loan.
How much you can borrow depends on your disposable income. To determine this, they will verify your income and expenses by reviewing your payslips and bank statements. Different banks use different systems for assessing income and expenses, so one bank may lend significantly more than another.
Either your deposit or your income will determine your maximum borrowing (whichever is lower). i.e., If you have a large deposit, but only a small income, then your income will determine your maximum borrowing (and vice versa).
Online calculators are popular, but unreliable. Your maximum borrowing can be estimated after an initial consultation, but calculating your exact borrowing capacity requires gathering all your relevant information and running calculations.
Other factors that can affect your borrowing capacity -
- Your available loan - the bank expects the loan to be paid off by 65. A shorter term will mean higher repayments, and will reduce the maximum amount you could otherwise borrow. In some circumstances, you can take a loan past 65, which is discussed in more detail under 'Loan Terms'
- Atypical expenses - if you have significant outgoings, i.e. debt repayments, child support, daycare, tithing, etc., then these will reduce your disposable income and the amount you can borrow
- Secondary income sources, like borders/flatmates, which increase your maximum borrowing
- The type of property you’re buying, as different properties may have different deposit requirements.
The below sections go into more detail on each aspect. The information is available there if you want it, or if you have a specific question you can get in touch directly via email, phone (call or text), or contact form.
How your income will be assessed, and what you can do to improve it
Different banks use different criteria and methods to evaluate income, which is one of the key advantages of using a mortgage broker rather than approaching the bank directly. It’s not unusual for one bank to lend an individual significantly more than another just because their assessment criteria suit that person's circumstances the best.
Assessing your income is about ensuring you can afford the loan. If you want to take out a loan that is going to cost you $1,000 a week, but your disposable income is only $800 a week, then that’s going to put you under financial stress, and you’ll inevitably stop making repayments.
Determining how much you can afford is about weighing your income against your expenses, with key distinctions.
The acceptable sources of income will vary between lenders, but generally speaking, are the following -
- Salary or wages
- Overtime (scaled at 80% depending on its reliability and/or on the bank)
- Self-employed income (sometimes average of last two years, sometimes lower of previous two years)
- Rental income (typically scaled at 75%)
- Border (flatmate) income
- Bonuses (can be scaled, or based on the lowest of the last 2 years)
- Commission
- Overseas income (can’t be self-employed, must be a NZ citizen)
- Paid parental leave (must have confirmed return to work date and sometimes must be within a few months of returning)
- Government benefits/pension
- Investment income
- Child support
Including a border in your application, such as if you plan to have flatmates or adult children contributing to costs, can be a powerful way to increase your maximum lending. If you have less than a 20% deposit, then you only include one border in an application, and if you have over 20%, you can include two.
Parental leave and ACC can both be used as income sources provided that you have a confirmed return-to-work date and are close to resuming work.
What you consider your income may differ significantly from the bank's assessment, and obtaining an accurate figure will require a conversation with an adviser.
Government benefits and child support can also be used, provided they are consistent and will continue for the foreseeable future.
What are test rates and why are they relevant?
When the bank assesses your application, they’ll stress-test it to make sure that you could still afford the loan if interest rates were to increase. To do this, they add ~2% to the current interest rates when assessing your affordability. This is one reason people may be declined for loans when their estimated repayments are equal to or less than their current rent. It’s also one of the many reasons why online “loan calculators” are so unreliable.
As an example, if you wanted to take out a loan of $500,000 on a 30-year loan term at 5% interest rates, then your weekly repayments would be $619. But the loan will be assessed at a test rate of 7%, so the estimated repayments will be $768 per week.
What are test rates and why are they relevant?
When the bank assesses your application, they’ll stress-test it to make sure that you could still afford the loan if interest rates were to increase. To do this, they add ~2% to the current interest rates when assessing your affordability. This is one reason people may be declined for loans when their estimated repayments are equal to or less than their current rent. It’s also one of the many reasons why online “loan calculators” are so unreliable.
As an example, if you wanted to take out a loan of $500,000 on a 30-year loan term at 5% interest rates, then your weekly repayments would be $619. But the loan will be assessed at a test rate of 7%, so the estimated repayments will be $768 per week
Guarantors and Kainga Ora Home Loans
A guarantor can be an effective way to buy a home if you don’t meet the bank's minimum deposit requirements. For example, if you want to buy a house but only have a 5% deposit (you still need at least 5%), and you have a guarantor, the bank will treat you as if you have a 20% deposit. So what does a guarantor actually do -
As the name suggests, they guarantee your loan, and if you’re unable to make the repayment, they’re liable to make up the difference. The key point is that most guarantors provide limited guarantees, so they’re not liable for the entire loan.
Here’s an example -
John and Jane want to buy a $500,000 home but have only a $25,000 deposit (5%). They can afford a $475,000 loan (95%), but they don’t meet the bank's deposit requirements. Jane's parents are still employed and have agreed to serve as guarantors. They provide a limited guarantee on 15% of the loan ($75,000), not the whole $475,000. If, for any reason, John and Jane are unable to pay their mortgage, the bank may require that Jane's parents make the repayments for the $75,000 portion of the loan. With this added security, the bank now considers John and Jane low risk and will treat them as if they have a 20% deposit, so they’ll receive the maximum available loan and the best available interest rates.
Even though no money changes hands, the guarantor is effectively taking out a loan and must undergo a complete lending assessment and obtain independent legal advice. They need equity to back the guarantee, and sufficient income to cover repayments if they’re called on to repay the loan. The guarantee will count toward their total debt and reduce the amount of lending they would qualify for if they applied for a separate loan.
Guarantees are complex and vary in nature, so you and your guarantors should seek legal advice before exploring this option. I’m a mortgage adviser, not a lawyer, so you should not take any action based on my description here of guarantors and their liabilities.
Kainga Ora First Home Loans
Kainga Ora first home loans act in a very similar way to a guarantor. If you don’t meet deposit requirements, they can get you across the line. Kainga Ora First Home loans have several criteria that need to be met before you can qualify -
- Income Caps: Household income before tax must be $95,000 or less for single buyers without dependents, or $150,000 or less for single buyers with dependents or two or more buyers.
- First Home Buyer Status: Must be a first-home buyer or in a similar financial position to one. Owning - Māori land is not an exclusion.
- Minimum Deposit: A minimum 5% deposit of the purchase price is required. This can include savings, a - KiwiSaver withdrawal (leaving $1,000), or a non-repayable gift.
- Owner-Occupied Property: The home must be your primary residence for at least 6 months.
- Property Size: The property must be less than 1 hectare.
As well as this, you’ll need to meet the bank's First Home Loan Criteria, which vary from bank to bank but generally are -
- Being under a minimum threshold of personal debt
- Having been employed in the same position for at least 12 months
A 1.2% ‘Lender's Mortgage Insurance premium’ is usually charged and can often be added to the loan.
How your expenses will be assessed, and what you can do to improve your application
When preparing to buy a home, some people worry they need “tidy” bank accounts with minimal spending, but this is not the case. Some amount of discretionary spending is always going to be normal, and while different banks will assess your expenses differently, they’ll all accept some amount of unnecessary expenditure.
When assessing your expenses, they’ll be split into two categories: fixed and discretionary.
Fixed expenses are the ones you can’t easily do without. Some examples include -
- Accommodation costs: Rent/board, mortgage repayments, and council rates/body corporate fees - (if your accommodation costs won’t continue after you buy a home, then they can be excluded)
- Utilities: Electricity, water, natural gas, telephone, and internet charges.
- Insurance premiums: home, contents, life, personal, and pet.
- Transport: Vehicle running costs, maintenance, and insurance.
- Food and Groceries.
- Essential Medical Expenses.
- Debt Repayments: Existing loan, credit card, and hire purchase repayments.
- Child/Family Support Payments.
- Tithing.
- Education Costs.
- Other regular, long-term expenses: Subscriptions, gym memberships, etc.
Discretionary expenses are ones that you can stop if you need to, and because of that, they’re assessed differently or sometimes excluded entirely. They include things like -
- Entertainment & Leisure
- Alcohol and nicotine
- Hobbies & Recreation
- Personal Care
- Subscriptions & Memberships
Subscriptions appear in both the fixed and discretionary lists, as they may depend on both the subscription and the bank assessing your application.
Reducing fixed expenses (where practical) can be an effective way to increase the maximum you can afford to borrow. Still, these expenses are typically fixed, as they’re essential for day-to-day life.
If you have debt, reducing it is a great option. Debts with redraw facilities, such as credit cards, are assessed as if they’re maxed out, so reducing a card or overdraft limit can be very effective. Extending the loan term can reduce monthly repayments and increase your borrowing capacity. Unless you have over a 20% deposit, it’s not possible to borrow extra funds from the bank and use them to clear your debts.
Reducing your expenses is also effective to a point, as the banks also use what are called “benchmark expenses. Benchmark expenses are what the lender expects a household of your size to spend per month. For example, if you live alone and your fixed monthly expenses are $1,000, but the bank's benchmark for an individual living alone is $1,200, they’ll use the higher of the two figures. In this case, further reducing your expenses offers no advantage.
Can I buy a home if I have debts?
Having debts won’t prevent you from taking out a home loan - they will, however, reduce the maximum amount that you can borrow.
Any debts you have will have regular repayments; for example, you might have a vehicle loan for $15,000, with repayments of $100 per week. That $100 per week will add to your fixed expenses and reduce your disposable income, so it will reduce the maximum amount that you can borrow.
Debts with redraw facilities, such as credit cards, afterpays, and overdrafts, will continually be assessed as if they are at their maximum limit. i.e., you might have a credit card with $500 outstanding but a $3,000 limit, so that it will be assessed as $3,000. Always consult an adviser before making any changes to your debts, as it may not be necessary or may even be detrimental.
Debt-to-income ratios
Debt-to-income ratios determine the maximum that you can borrow according to your income. It typically sets the maximum an owner-occupier can buy as 6 times their annual income, and loans for investment properties at 7 times their income.
As an example, if you earned $100,000/ year and had no other debts, then you could borrow a maximum of $600,000 to buy a property to live in, or $700,000 to buy an investment property. However, if you have existing debts such as credit cards, vehicle loans, or student loans, they will count toward your total debt and reduce your maximum borrowing.
It's important to note that banks have some discretion on DTI limits, and if the rest of your application is strong, that can sometimes allow an applicant to exceed the 6/7x limit. It depends on the bank's overall risk position and is one of the many reasons it's essential to work with multiple banks through a broker rather than approaching a single bank.
Loan terms and exit strategies
Typically, a mortgage is taken out for 30 years, but if a 30-year term would take you past retirement age, the lender may require a shorter loan term. i.e., if you’re 4,5 then your maximum loan term may be 20 years. A shorter loan term means your regular repayments are higher, reducing the maximum you can borrow.
Sometimes it’s possible to have a loan term that takes you past 65, examples include -
- Downsizing your property: Selling your current home and moving to a smaller, less expensive property, using the substantial price difference to clear the outstanding mortgage balance.
- Using retirement savings as a lump sum: Using funds from your superannuation (e.g., KiwiSaver in NZ) or other retirement savings/pension accounts to make a one-time principal repayment when you reach retirement age.
- Selling other significant assets: Liquidating investments such as a second property, shares, or a car/boat.
- Having enough ongoing retirement income, like from the pension, investment properties, or dividends.
- Continuing to work, part-time or full-time, past the retirement age
- Receiving an inheritance: While not guaranteed, an expected inheritance can be a potential part of an exit strategy, provided it is likely to cover the remaining debt.
Got a question that hasn't been covered?
This guide is intended to be comprehensive without being overwhelming. While I’ve tried to cover the main aspects of a lending approval, several things have been left out or covered briefly. If you have read the guide and have questions, please feel free to get in touch. You don’t need to be ready to buy to start talking to an adviser; all our advice is free, and helping you prepare for a loan application is as much a part of our job as making the application itself.