FROM FINANCIAL HOT MESS TO HOUSE DEPOSIT

In the first of two extracts from her book Tales From a Financial Hot Mess, Cooking the Books host and OneRoof columnist Frances Cook highlights the ways Kiwis can conquer what can often be hardest part of buying a home: the deposit.

“KiwiSaver is a retirement scheme, yes, but you’re allowed to break into it for your first home deposit. It’s also a scheme that you can supercharge.”

Getting that first deposit is, to my mind, the hardest part of buying a house. Often the mortgage repayments are the same as or possibly even lower than your weekly rent. It’s just saving up that huge chunk of cash that will convince the bank to give you the rest. It’s a killer.

David Boyle, the guy who used to work at the Commission for Financial Capability and is now with Mint Asset Management, is a KiwiSaver wizard. That’s where he thinks you should start in saving up your house deposit; KiwiSaver.

KiwiSaver is a retirement scheme, yes, but you’re allowed to break into it for your first home deposit. It’s also a scheme that you can supercharge. If you’re saving at least 3 per cent, then you’ll get the employer contribution of 3 per cent and the yearly tax credit of $521. Suddenly, you’re not only having to save your own money. You’re reaping the rewards of KiwiSaver incentives, which are doubling your money before you even get an investment return.

David says that’s exactly what you need, if you’re going to pull together that intimidating house deposit. “I can’t think of a better way to save for your deposit. Those extras make all the difference. Then you need to think about the length of time it will take to get you there. That’s what will guide your decision, in terms of what fund you choose.”

We’ve talked about knowing your timeline and investing according to it. You don’t want to lose everything if you don’t have much time, but you don’t want to miss out on returns if you do have time. If you want to properly supercharge your retirement savings for a house deposit, you need to think about how much time you need.

Look at the average first home price in your area (check online or call some real estate agents), work out how much deposit you’ll need (usually a minimum of 10 per cent, 20 per cent looks better to the bank if you can get it), and then work backwards to see how long it will take you to save.

Maybe you’re stuck in an expensive place like Auckland or Queenstown and don’t have the option to move somewhere cheaper. That might mean you’ll be saving for five or 10 years, which is good and bad. It means you have the option of making your money work harder while you wait, with a little more risk to get better returns.

Maybe you’re somewhere cheaper or you’ve been saving a while already. Everyone’s situation is different, but many of the financial experts agree that if you plan to use the money within five years, you should keep it in a conservative fund.

David says you don’t want a market downturn just as you were ready to put down a house deposit. “Anything with exposure to equities needs a five-year minimum. And more than that if you’re looking at a growth fund. You do want a bit of growth, but not to risk maybe 20 per cent of your balance if a correction occurs, something like that.”

You also definitely don’t need to stop at your minimum 3 per cent KiwiSaver contribution – remember compounding, so every little bit you can save will help. Just make sure you’re putting it somewhere that makes sense for how long you plan to save.

You could talk to payroll at your company and increase how much you’re putting into KiwiSaver, or you could invest extra elsewhere yourself, looking at term deposits or shares depending on how much time you have. This is a good time to think about going to see a financial adviser who can help you to decide on a plan.

Pull every lever you have to get yourself over the line. Each little bit tips the scales further in your favour.

If you’re in Auckland or some other expensive city, it’s not easy, but there are options. You can look for cheaper housing, like an apartment or townhouse. You can move elsewhere, although that’s not always possible depending on what you do for work, or because you want to stay close to family. Money is simply a tool to achieve quality of life, after all, and having your loved ones close by is huge for that.

David Boyle suggests an investment property in a cheaper city as another option, either to start building your leverage or maybe as somewhere you want to live in the future. It’s a good point. Sure, you’re based in Auckland now, but what if your family live up north and you’d like to move back at some point?

Well, then maybe you should save up a Northland-sized deposit, buy a place there and rent it out. Then you carry on living in Auckland, still renting yourself. I know someone who did that with a Tauranga house before Tauranga houses went crazy. That home would be worth a pretty penny now. Just remember this strategy means you can’t use your KiwiSaver; you can only break into your KiwiSaver for your first home that you will be living in – not an investment property someone else will be living in. This is just another reason to get your maximum benefits from KiwiSaver and then have other investments that you control yourself. It’s good to have other money working hard elsewhere that you can use if you need it.

Mortgage Lab’s Rupert Gough says you can think about how big a deposit you want to save. There is flexibility. You can sometimes have only 5 per cent for a fixed-price building contract. But in most situations, 10 per cent is considered a low deposit, and 20 per cent will get you good treatment from the bank, including more willingness to negotiate on rates. “If you can get to 20 per cent deposit, you will get a better deal from the bank. We had a client who had saved up 17 per cent – they managed to get that last 3 per cent gifted to them, and it saved them $10,000 because the whole mortgage rate dropped by about 1 per cent,” he says.

Once you’ve reached that home deposit goal, whether it takes months or years, take a moment to celebrate. Then prepare yourself for the next phase – convincing the bank that you’re a good bet.