The financial advantages of buying new

How to get a mortgage for a new home

Financing your first home purchase is a learning curve. The good news is that it’s usually easier to get a mortgage for a new home because in most cases the deposit is just 10 per cent. That’s easier to come up with than the 20 per cent you need on an existing home.

The other big advantage with a new home, says John Bolton of Squirrel Mortgages, is that you’re not competing with other buyers at auction.

The basics

To buy your first home you need a big enough deposit and sufficient income to pay fortnightly or monthly mortgage repayments.

- Getting ready: You will mostly likely need to learn to spend less, save more and pay down consumer debt if you have it. Also consider paying off your student loan, says Stuart Wills of Mortgage Managers. Your mortgage lender will look at how much you can afford to pay, and that’s reduced by your student loan payments.

- Your savings/deposit: You can buy a new home with a 10 per cent mortgage, or even five per cent sometimes. You will, however, pay a slightly higher interest rate or a one-off “low equity fee”, says Wills. If you can, it’s best to have a 20 per cent deposit.

- Kiwisaver withdrawal and the First Home Grant: Most first-home buyers withdraw savings from Kiwisaver to buy their first home. You may also qualify for the First Home Grant, which can add up to $20,000 free for a couple buying a new build. That’s twice as much as you can get for a second-hand home.

- First Home Loan (formerly Welcome Home Loan): This scheme managed by Kāinga Ora helps you buy with a five per cent deposit on a standard interest rate, by guaranteeing a portion of the mortgage. It’s good way to start your home ownership journey if you qualify.

- The bank of mum and dad: Lenders will look at you more kindly if you’ve built up good old-fashioned savings by yourself. Even so, mum and dad often gift money towards the deposit, says Wills. Some lend the deposit, although lenders aren’t always keen. Some parents co-buy a percentage of the home or they “go guarantor” (guaranteeing all or part of the mortgage). This can be risky for parents.

Ready built or off-the-plan?

- Ready built: Banks prefer to lend on ready-built new homes. A home is considered “new” for the purposes of getting a mortgage providing you settle within six months of receiving its code of compliance certificate. This is the easiest type of new home to borrow on, say Bolton.

- Off-the-plan: This is a home being sold before it’s built. It’s usually an apartment or townhouse. You will pay a 10 per cent deposit from your savings to secure the contract, then the remainder when the build is complete. Banks will lend on these contracts but you need to apply again for mortgage pre-approval every three to six months until it’s completed, says Bolton.

- Home and land: Large building companies sell home-and-land packages. Typically you’ll buy the land from the builder first with a deposit and then the bank releases “progress payments” as the build progresses. Banks prefer 20 per cent deposits for home-and-land packages, says Bolton. The other type of new build is where you buy a section, have the house designed, then employ a builder. It’s rare for banks to lend to first-home buyers for this type of build, says Bolton.

Getting pre-approval

- Be organised: Most first-home buyers have their mortgages “pre-approved” before they go shopping for a home. You’ll need to collect bank statements and other financial paperwork to give to your independent mortgage advisor or mobile mortgage manager who works for the bank.

- Start applying: You need to complete a mortgage application form. Your advisor/manager will help you with that. Once approved, you will know how much you can spend on your first home.

- Be aware of the conditions: Mortgage approval is conditional. You’ll only get the money if both the registered valuation and the actual property are acceptable to the lender.

Ready, set, go

Now that you understand the process, it’s time to make it happen. You can make offers or bid at auction.

- Show the contract to your lawyer: Your lawyer will check all the legal documents including the LIM report and title. Lawyers sometimes pick up issues that could result in the bank withdrawing your pre-approval.

- Talk to your mortgage adviser or manager: They can help ensure there are no last minute hiccups with the mortgage.

Second time around

You may find that you can’t quite qualify first time around for a mortgage. Don’t give up, says Lesley Harris, of the First Home Buyers club. Many first-home buyers find a way to buy within six months or a year. If you’ve only tried one bank, go to a mortgage adviser who can shop around banks and second-tier lenders for you, says Harris. Or go back to the drawing board. Reduce your debt and save a bigger deposit. Close any unused credit cards, hire purchase or other lending, she says. Their mere existence reduces what you can borrow.

Keep up hope. Every year many thousands of young New Zealanders buy their first home. You can do it too.