Buying your first home is one of the most exciting purchases you will ever make. For some people it may be the only home you ever buy, for others, it may be the first home of many.
Whichever camp you fall into, getting your finances sorted early is essential – as saving for that first home deposit should come well before you start spending your weekends driving from open home to open home.
How much money do you need for a first home deposit in New Zealand?
Generally in New Zealand, banks will require a 20% deposit for you to apply for a mortgage, though criteria does change from time to time. You may be able to access a lower deposit amount but you will likely be subject to higher interest rates as well as needing to take out mortgage insurance. Bear in mind that the bigger your upfront deposit, the less you’ll pay in interest over the longer term.
At present, the housing market is incredibly buoyant and especially difficult to break into for first time home buyers. With a lack of supply, interest rates at record lows and the return of Ex-pat Kiwis due to the Covid-19 pandemic all placing pressure on the housing market and driving up prices. Whilst government changes around urban development and repealing the Resource Management Act are aimed to make it easier to build housing, it will likely be years until the positive impact of these is felt for buyers. So saving as much as possible for a deposit in the interim, is key.
No matter what option you choose as your first home, getting your finances in order and a clear savings plan in place will help. Here’s a closer look at how to finance your first home purchase.
The most common way first home buyers finance their property is with a mortgage. Also known as a home loan, mortgage finance can be obtained directly from a bank or by using a mortgage broker. With home loan interest rates currently at record lows, servicing a mortgage is easier with buyers able to choose higher repayments or shorter periods to pay it off faster.
There are many different mortgage options with varying interest rates. Common mortgage types include:
- Fixed term:
An agreed interest rate is paid over a set time period
No agreed interest rate/time period, historically higher interest rates but greater flexibility
Your savings are offset against your mortgage balance so you do not pay interest on the full balance of your mortgage
- Revolving credit:
Your pay and mortgage are transacted in the same account with interest calculated daily. You have the ability to make lump-sum payments and redraw money at any time
Generally a mortgage will take 20-30 years to repay. The larger deposit you have upfront will reduce the amount of interest you pay, or the term (period) of the loan.
When applying for a mortgage, banks and lenders will make checks (credit checks and non-credit checks) to ensure that you can service your mortgage ongoing and can afford your repayments if interest rates were to increase.
If you think a mortgage is the right option for you, it’s good to consider these tips before you start the process.
Some Kiwi prefer to use a mortgage broker to help them secure a mortgage. A mortgage broker typically has access to a wide range of lenders and is motivated to get you the best mortgage interest rates for your individual situation. They also help with the paperwork involved in your mortgage application, which can be great for first time home buyers, or those who are less confident with financial matters.
If you’re keen to understand how much your mortgage repayments might be, based on the size of your deposit and expected interest rate, online mortgage calculators are a great starting point.
There are also specialist loans available for specific types of house purchases.
Special loans for construction or prefab homes
Buying an existing property is fairly straight forward, but your mortgage application process can start to get complicated with other types of house purchases or construction projects. If you’re considering a new build, a prefab or flat pack home, you’ll need a construction loan. Typically you’ll need a larger upfront deposit for a new build project, and a clear idea of how the build will be conducted (if you’re using a building company, they’ll be able to support you with the information you need to provide).
Unlike a standard mortgage, you’ll draw down on your loan in stages, at key milestones of the build, which is helpful in the sense that you only draw down on the loan and pay interest on the money you borrow, as you need it.
Bank loans with help from family
Some first home buyers are lucky enough to get support from their family (such as from mum and dad) when they’re buying their home. Support can come in different ways - it might be a financial contribution to your initial house deposit, co-ownership of your property, or a willingness to be a guarantor on your mortgage contract.
Being a guarantor has financial risks and obligations, as they can be liable for repayments, outstanding fees and interest if mortgage payments were to stop for any reason. A guarantor can also be liable for any other defaulted loans with the same provider, so it’s important family members are clear and upfront about their intentions and commitment from the outset.
For those who are only recently employed or self-employed, it can be difficult to provide the type of financial history a bank may require for a mortgage, such as two years of financial statements. People with poor credit history may also struggle to obtain a loan. Non-bank lenders (also known as second-tier lenders) may be used to secure finance instead.
Typically, a non-bank lender will not provide competitive interest rates, so mortgage repayments will be higher. These lenders have their own risks so it’s important to carefully consider all of your home finance options.
Using your KiwiSaver investment for your first home deposit is a great way to build and/or top up your deposit. You might be surprised how quickly your KiwiSaver balance has been building. Other than you contributing each pay period, your employer usually has to contribute a minimum of 3% of your salary, and the NZ Government provides up to $521 each year if you contribute at least $1,042 every 12 months.
There are a few rules around using your KiwiSaver money for your first home purchase. Eligibility details include being enrolled in KiwiSaver for at least 3 years, and you can only make a KiwiSaver first home withdrawal once.
3. Investments and savings
If KiwiSaver isn’t an option for you or you would prefer to keep these funds for your retirement, alternative options for buying property include savings accounts, term deposits, investments in shares or managed funds.
A managed fund is similar to a KiwiSaver account in that your investment is managed by an experienced investment team (with no need to navigate financial markets yourself) but offers much greater flexibility for withdrawing your money.
You can get a Kiwi Wealth Managed Funds account up and running with as little as $100. You decide how often you want to contribute and when you want to access it. Long-term, managed funds usually generate greater returns than term deposits, although they can fluctuate over time so are a good option for goals at least a few years away.
Managed funds can also be a good option once you’ve purchased your first home, to save up for those house renovations, or to finance a future rental property.
4. Government help for first home buyers
Struggling to get a house deposit together? There are some support options available but specific eligibility criteria apply:
First Home Grants
First home grants are financial grants of up to $10,000 available through Kāinga Ora for people who have made regular KiwiSaver contributions for at least 3 years. You can check your eligibility via the Kāinga Ora website.
First Home loans
Kāinga Ora also have first home loans available which require only a 5% deposit, rather than the usual 20% deposit requirement of most banks. The eligibility information for these can be found on the Kāinga Ora website.
KiwiBuild is a government scheme aimed at bringing new, affordable homes to market with price caps between $500,000 - $650,000 depending on which region in New Zealand. You can see what options are available in your region on the KiwiBuild website.
5. Help from family
For most first home buyers, saving for a deposit is a challenging experience with living expenses, student loans and other commitments limiting the amount of income that can be put aside.
If you are lucky enough to have family that can financially support you into your own home, this support can take many forms:
- A financial gift to be used towards a house deposit,
- Acting as a guarantor on your home loan,
- Buying a section and building a property together,
- Buying a house jointly with parents and children,
- Buying an existing property and renting it back to their children,
- Gifting or selling (below market rates) the family home to a child and downsizing to a smaller residence. This is known as gifting equity.
6. Rent to own
There are limited options for rent to own schemes in New Zealand, but the charitable trust, NZ Housing Foundation, does have options for first home buyers in Auckland and Christchurch. Rent to own is a great option for lower-income households looking to get onto the property ladder. You’ll still need a house deposit and to meet the maximum income threshold.
The scheme works by renting your home for five years from the Foundation, then having the option of buying the property at the end of your tenancy.
Get started with Kiwi Wealth
Keen to know more about getting onto the property ladder and your options for saving for that house deposit? Learn how the Kiwi Wealth KiwiSaver Scheme can help and start making plans for your tomorrow.