Te Awamutu Courier

Howto set a budget for your first home

- Diana Clement

If you want to buy your first home, it is important you have a realistic budget from day one. It’s the first step in working out how much you can afford and how much the bank is likely to lend you. How much can I borrow?

The first step in working out how much you can afford and how much the bank is likely to lend you is to crunch the numbers to determine how much you can afford to spend.

Most buyers need 20 per cent of the home’s purchase price as a deposit in order to borrow the rest as a mortgage. With a brand-new home, the deposit is 10 per cent. If you qualify for schemes such as Kāinga Ora’s FirstHomeL­oan and FirstHome Partner, it is possible to buy with a 5 per cent deposit provided you meet certain income and price thresholds.

To calculate how much you have for a deposit, add up how much you have saved already in KiwiSaver, other investment­s and in the bank. You may be able to borrow money from the bank of mum and dad, or, if you’re lucky, receive a gift that helps you gather sufficient deposit to buy.

Once you’ve worked out how much deposit you have, you will have an indication of how much you can afford to pay for a home.

Supplement­ing income to afford repayments

How much you can borrow for a mortgage comes down to how much the bank believes you can repay comfortabl­y. Often, first-home buyers will seek to supplement their income to help cover the repayments:

● Buying as a single or a couple: Buying with two incomes is usually easier than one. If you are applying for a joint mortgage (with a partner, family member or friend) the bank will calculate how much it will lend you based on your joint income and expenses. If the mortgage is 100 per cent in your name the amount you can borrow will be based solely on your income and expenses.

● Having a tenant, flatmate or boarder: If you plan to live with a flatmate in your new home, you might be able to count some of the rent as income in the mortgage calculatio­n.

Speak to the bank or a mortgage adviser

Your bank’s mobile mortgage manager or an independen­t mortgage adviser (broker) can help you do the numbers. The service is usually free. Your manager or adviser will go through your finances and advise on issues such as consumer debt, and suggestway­s to increase the available surplus you have for repayments.

You’ll need to learn some of the jargon

● Loan-to-value ratios (LVRs): The percentage of the loan that the bank is willing to lend. It adds up to 100 per cent. So if the LVR is 80 per cent, you need a 20 per cent deposit.

● Debt-to-income ratios (DTIs): Some banks will only lend you a certain multiple of your income, such as six times your salary.

● Credit Contracts and Consumer Finance Act (CCCFA): A law that requires lenders to act responsibl­y. It can, however, restrict how much home buyers can borrow because banks are required by law to ensure the loan is affordable for the buyer. Pay more than the minimum repayment if you can

Most first-home buyers take out a 30-year mortgage because the repayments are lower than shorter mortgage terms. However, the longer the mortgage term the more interest you will pay in total over the lifetime of the loan. If you can afford to, it’s worth budgeting for higher repayments or a shorter loan term (25 or 15 years). What you can afford now might change in the future

When banks assess whether they will lend to you, they use a test rate which is several percentage points higher than the actual interest rate. This helps ensure you can afford the mortgage if interest rates go up. Things to consider

A home-buying budget takes into account how much you earn, how much deposit you have, the costs of buying, and what your one-off and ongoing expenses will be.

Make sure you calculate the upfront costs of buying a home such as lawyers’ fees and LIMs, and also new ongoing costs such as council rates, body corporate fees and house insurance.

What are the upfront costs and legal fees?

The total amount of money you need to buy a home is more than just the deposit. Upfront expenses for buying a home include:

● $1000 to $1500 for conveyanci­ng/ legal fees

● At least $400 for each building inspection

● Around $300 for each LIM (Land Informatio­n Memorandum)

If a house purchase falls through and you have to start again, you may have to pay more than once for building inspection­s and legal fees. Additional costs

Moving in also costs money. There are removal truck costs if needed, utility connection fees and you will need to buy furniture and furnishing­s.

The cost of buying a home doesn’t stop with moving in. You may need to budget for renovation costs.

Ongoing expenses include fortnightl­y or monthly mortgage repayments, utilities bills, council rates, home insurance, and maintenanc­e. In many apartment complexes you will have body corporate fees to pay, which do at least cover your maintenanc­e and insurance.

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 ?? ?? If you’re a first home buyer, your budget will be based on how much money you can borrow from the bank.
If you’re a first home buyer, your budget will be based on how much money you can borrow from the bank.

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