Every day we talk to frustrated first home buyers with excellent stable income but to get a deposit up to 20% in today’s housing market takes years. It’s a common story. You’re ready and can afford to take on a mortgage but the bank won’t let you. Kāinga Ora isn’t an option for higher earners due to income caps and house price caps. It just isn’t fair, right?
Squirrel is in a unique position that we are both a broker and a lender, enabling us to do what other brokers or lenders can’t. We engineered the Launchpad process to enable first home buyers to shoot into home ownership faster. And we can’t wait to help as many first home buyers as we can.
Here is a common scenario we see regularly:
1 This rate can range from 2.99% to 3.49% depending on term(s) selected.
Option 1: keep on renting while they save up for a 20% deposit; or
Option 2: take on the Launchpad loan and get into their own home quicker.
To help Jane & Steve decide, here’s a very basic comparison of the rental costs and borrowing costs they would likely incur under these two options over a 5 year period:
Over 5 years, they could either:
Worth noting is that the blended interest rate automatically drops as they get more equity in their home – that’s because they are repaying the higher cost personal loan first and getting a higher proportion of their total borrowings from the mortgage loan component of the Launchpad loan.
It's also worth mentioning that the personal loan can be repaid early, with no fees for early repayments. That gives Jane and Steve the ability to lower the average interest rate they are paying even faster if, for example, they receive lump sums from bonuses or gifts etc. or have increased earnings.
The value of the house they purchase obviously has a bearing on whether they are better off renting and saving or taking out the Launchpad loan and getting into home ownership sooner. We clearly can’t predict what the house value might be in 5 years – but the scenarios are: that the house value is the same, it is lower, or it is higher.
Scenario 1: at the end of that 5 year period, if the house value hasn’t changed:
Under this scenario, it is pretty much neutral whether they are better off waiting for 5 years to come around and jump into the market then or buy in now. They will have to save a little longer though as they’ve only managed to accumulate a $159k deposit in this example.
Scenario 2: at the end of that 5 year period, if the house value has gone down 5%:
Under this scenario, their equity in the home will have reduced by $42k over the 5 years and they will probably have been better off to rent, save and wait to purchase the house.
Scenario 3: at the end of that 5 year period, if the house value has gone up by 5%:
Under this scenario, option 2 clearly shows that they are better off taking the Launchpad loan and getting into home ownership sooner. Note under this scenario, the deposit required to buy that same house under option 1 has increased, meaning it is probably another year or so before Jane and Steve will save enough for the deposit on that house.
Which scenario do think is more likely?
The boring bit:
This blog post is intended as a guide for illustrative purposes only and is not intended to provide financial advice. It does not include a full analysis of the affordability of this loan nor the sundry costs associated with home ownership. Interest rates are indicative and subject T&C’s and are subject to change.