Updated: 11th March 2022
We wrote this article for Stuff before the good news broke that those much-needed (and hard-fought) changes to the CCCFA laws were on the way. Those changes mean would-be borrowers aren’t going to be subjected to such intense scrutiny over their expenses and outgoings anymore – and that’s awesome!
While some of the details included here aren’t quite so relevant anymore, getting your finances in tip-top shape will always be an important part of setting yourself (and your home loan application) up for success. And these tips are a great starting point.
A lot’s changed in the New Zealand housing market since the end of last year, and for first home buyers, that’s created fresh challenges and opportunities.
On one hand, the market is slowing. Gone are the days of insane house price growth, fuelled by collective FOMO. A combination of higher interest rates, removal of tax deductibility for investors, increased supply, and a relatively static population, has brought back some much-needed balance.
That’s the good news.
On the flip side, new LVR restrictions and hyper-prescriptive responsible lending (CCCFA) laws have made getting a home loan more of a challenge.
In the short term, tightened LVR restrictions will mean big trouble for low deposit borrowers, but those will start to ease very soon. The CCCFA laws aren’t going anywhere in a hurry, though, and that means more work to get yourself bank ready.
But don’t lose hope. There’s plenty you can do to set yourself up for success.
Under the new laws, lenders are trawling through bank statements (and spending habits) with a fine-tooth comb.
What they’re actually looking for is proof of regular, intentional savings – and that between those and your rent, you’ll be able to cover your mortgage.
If you know roughly how much you want to buy for, what your deposit is, and therefore what you need to borrow, then jump online and put all of that into a mortgage calculator at about 6 per cent interest.
That repayment figure is what you need to prove you can afford. And every dollar you spend, when you could be saving it instead, is going to make that harder to do.
As you’re tidying up your finances, remember: the goal isn’t to cut out everything that makes you feel good in life. So, you’ll need to cut back on things like going out to dinner, but you probably don’t need to cancel your gym membership.
And the sooner you can start, the better.
Getting your finances in order also means cleaning up credit. Pay off credit cards ASAP, and get rid of unused credit limits or accounts.
“Buy now, pay later” services, and interest-free purchases from retailers, should be avoided like the plague. The new laws mean that even if you’re not using these facilities when you go to apply for your mortgage, the lender has to factor them into your expenses – so they’re bad news all round.
Student loans are probably the single biggest expense impacting on your affordability.
A student loan sucks up 12 per cent of every dollar you earn over the repayment threshold, after tax. If you’re on $80,000 a year, that’s roughly $600 a month – which, in your bank account, would give you about $95,000 more in borrowing power.
When it comes to home loans, a 20 per cent deposit is gold. If that’s within reach, keep saving.
Anything between 10 and 20 per cent is considered “low deposit”*. And to the banks, it really doesn’t matter which end of the scale you’re at – they treat them all the same.
So, if you’re comfortably over 10 per cent, but 20 is too much of a stretch, you could have more to gain by using some of your deposit to pay off debt.
Before you forge ahead, you should always chat to a mortgage broker to see if this approach is right for you.
(*Working with anything less than 10 per cent is really tricky right now. You’d need to satisfy a whole lot of criteria and tap into a niche product like Squirrel’s Launchpad to help get you over the line.)
We see a lot of people maxing out their KiwiSaver contribution as a means of forced savings for a house deposit. But unless your employer is matching that contribution, you could be better off sticking with 3 per cent and putting the extra funds into savings.
That’s because, to my last point, it’s a lot harder to use KiwiSaver to pay off debt before buying than if that money’s sitting in the bank. You’ll also be demonstrating intentional saving behaviour – and lenders really love that.
If you’ve got kids, not much can be done about childcare costs, but they’re going to have a big impact on your affordability, so anything you can do to reduce them is worth considering.
There are milestones when costs may drop – when you can claim the ECE subsidy (ages 3 – 5), or when kids start school, and those can make a big difference. Remote working can also be great if it means you can manage childcare around school hours.
When the stakes are so high, navigating the new law changes will feel like daunting stuff – and a good mortgage broker is going to be your best resource to help you through.
This article was originally written for Stuff, and can be viewed here.