First Home Buyers: Ready, Steady, Go!
It is a buyer’s market – but that does not make buying easy. Most first home buyers tell us it is hard work finding decent houses in their price bracket. They also have to deal with vendors who are still holding out for better prices.
In the current market there are some great deals to be had, but you have to be actively looking for property to find them and then you have to negotiate. Nobody ever gained a great deal by being a wallflower!
First home purchases are seldom completely rational decisions – otherwise we would all rent forever or live in house buses. In Auckland, desirable and affordable entry-level properties are scarce. For this reason (if you can look beyond the doom and gloom) it might pay to get into the market before everyone else does. From what we are seeing with our first home buyers, prices are down about 15% from their 2007 peak (or 5% below 2005 to 2006 capital values).
As first home buyers, now more than ever, you need to plan your way into the housing market. Talk to a mortgage broker early on. Even if you are not ready to borrow, they can give you advice on what you need to focus on in the short-term to increase the amount you can borrow. Mortgage brokers deal with most lenders across the market – this is important as lenders now have wildly varying credit policies, mortgage products and pricing.
The global credit crisis has destroyed the notion of cheap credit and with it has significantly lifted the costs of borrowing. This won’t necessarily come through to you as higher rates, but it will come through as much tighter credit criteria. Banks have become more conservative with their lending and the amount that first home buyers can borrow has dropped by about 30%. As a rule of thumb you can currently borrow your income divided by two, multiplied by seven. That means that a couple with an income of $100,000 can borrow around $350,000. Most of our first home buyers are getting mortgages between $300,000 and $380,000.
If you are borrowing over 90%, lenders apply different rules and require you to pay off your mortgage more quickly (over 20 years). A 10% deposit will get you around these tighter rules and increase the amount you can borrow.
A 10% deposit on a $400,000 property might take a while! For the lucky few, some lenders will still do 100% mortgages provided:
- your household income is over $100,000,
- you have stable, low-risk jobs,
- you have minimal consumer finance debts,
- and you have a clean credit history.
The emphasis these days is entirely on your ability to easily service the mortgage.
Given tighter credit criteria, vendor finance is becoming more common. It can be an effective option if you do not have a saved deposit. With vendor finance the vendor leaves a 10% to 20% deposit in the property as a second mortgage which is repaid in three years’ time. Vendor finance manoeuvres you around stricter credit criteria (and hefty low-equity fees), so it can be surprisingly cost-effective, but it won’t fall into your lap. Talk to us to see if it will work for you and talk to real estate agents to find willing vendors.
