A common question people are asking amongst family members as well as advisers, is “when is it the right time to buy?” Is it a good time to buy or whether they should be saving until they have a big deposit.
This is a question that all first home buyers ask, not only in New Zealand but all around the world.
When COVID hit last year (2020), there were a number of economists that were predicting house prices to fall in which case waiting was seen as a good option especially as it would allow you to save a bigger deposit while house prices were not expected to rise. If anything first home buyers were nervous that they may lose money if they purchased too soon.
The best option at the time was waiting, or at least until it was confirmed that COVID was not going to cause the housing market to crash or even stall.
Banks Are Asking For 20% Deposits For Home Loans
The banks will offer home loans to people with less than 20% deposit, but to be frank, their preference are those with a 20% deposit.
The best home loan interest rates are offered if you have a minimum of 20% deposit, and most banks provide cash incentives too. If you have less than 20% deposit, banks will charge a higher interest rate, which most banks refer to as a low equity premium or low equity margin. The banks also offer a cash incentive but it will be less and in some cases none at all.
Many first home buyers think that due to these reasons, it is best to wait until they have a large deposit so they can get the best rates. However, due to a rising housing market, we need to accept the higher costs and buy a house now,
Things To Consider…
If you are planning on saving for a large deposit before purchasing your first home, you should factor in what has been happening to the New Zealand housing market, then consider what you think may happen in the future too.
History will not predict future house prices, but you should be aware of what has happened in the past for you to to make a decision.
The Real Estate Institute of New Zealand (REINZ) has some useful data that shows house price movements.
The graph below shows how house prices have dramatically increased over the years and apart from the Global Financial Crisis and few preceding years the market has tended to rise, and at times very sharply.
Do you believe that the housing market will continue to rise?
Deposits And How Much Is Required
How much deposit do you have?
A minimum of 20% of the purchase price for a new home is preferred by the banks, however, in larger towns and cities, you may require a larger deposit. Having less than 20% deposit means that the bank will be harder on your mortgage application and they will not offer the same interest and cash incentives as those who have a minimum of 20% or more.
Banks tend to scale the low equity margin or premium depending on the deposit. This can often mean paying an extra 0.75% if you only have 10% deposit but 0.20% – 0.30% if you have a 15% deposit.
The non bank lenders also scale the interest rates charged and offer some good options that may allow you to get into your first home with lower deposits as they can combine with a second mortgage to help get the required amount.
Co-Ownership is an option that is popular overseas and is becoming a thing here in New Zealand. Co-Ownership allows you to purchase a home with as little as 5% deposit, generally funding up to 80% at times more with a non bank lender and then having a company take some equity to make up the difference. There are some pro’s and con’s to this option, but it allows you to get on the property ladder now where otherwise you may end up waiting and watching house prices go up.
Is It Worth Waiting?
The problem is that if you continue to wait, house prices will continue to increase.
You may have be looking to buy a home for $650,000 12-months ago, and using the average increase over the last year that house would have increased by approx. $110,000 (17.3%). Of course if you have ‘say’ 10% a year ago you would have had $65,000, but to buy the same house now you would be paying $760,000 and so you would have needed to save an extra $11,000 ($76,000) just to still have a 10% deposit. To save a 20% deposit you would have needed to save an extra $87,000 over that 12-month period.
The other option would have been to accept that your mortgage was going to cost more in which case you would have purchased for $650,000 with a 10% deposit ($65,000) and therefore had a mortgage of $585,000. Even if you had to pay low equity margin of an extra 0.75% then the extra interest that you would pay would have been about $365 monthly or about $4500 over that 12-month timeframe. With the right bank (mortgage policy) you could have had the low equity premium removed during the year when your property had increased by 10% and therefore got the lower discounted mortgage rates.
Still Paying Rent
While you are saving you are still paying rent. Once you purchase, the money that you were paying as rent will go to pay the interest to the bank. Both rent and interest can be described as a cost.
Rent will continue to increase over time and is a cost that you have no control over.
You do have some control over the interest that you pay, and over time as you pay off your mortgage the interest cost goes down until eventually your mortgage is paid off and there is no more interest to pay.
Owning your own home does give you more control over your money, even if the mortgage feels quite daunting to begin with.
Get in touch with an adviser for more help or feel free to contact me.
