If you're thinking about buying a house, the amount of debt you will have to take on is probably enough to keep you up at night.Data from Homes.co.nz shows that the typical value of a first home on Auckland's North Shore is now $777,000. In Hamilton, it is $469,750, in Wellington, $592,300 and Christchurch $382,250.
That means, even with a 20 per cent deposit, buyers are taking on mortgages of hundreds of thousands of dollars, and many times what they earn in a year. It might be enough to make you feel vaguely ill. But there are ways to minimise the debt and stress of a first-house purchase.
This seems obvious. But when the media is full of stories about house prices soaring and all your friends are talking about getting on the property ladder, it can be easy to feel that the time to act is right now. Or better still, yesterday. But the truth is that good times and bad times to buy roll around at fairly regular intervals. Sure, buying five years ago would have got you a cheaper house. But if you do it before you are ready or rush into it, you are much more likely to get burned.
Case in point: Me. I was very focused on buying a house in my early-20s. The property boom of last decade was in full swing and I figured it was better to buy anything than nothing. So we bought a place in Glen Eden, spent a serious chunk of change trying to do it up and then sold it two years later when we realised we were way too young for a life in the suburbs. But the market had dropped and someone else got a serious bargain out of all my hard work.
If I had waited until I was closer to 30, I might have paid a bit more for the property but I would have accumulated a bit more in my KiwiSaver account, too, would have been earning more and would have had a much clearer idea of where I wanted to live.
I would have saved on the misguided renovations and the $20,000-odd paid in commission to the real estate agent who found the lucky buyer.
Wait until you've got a solid job, good savings, and you can commit to holding a property for at least five years. Don't buy just because you think it's your last chance, or all you will ever be able to afford.
Consider your next move
Sure, you want to buy a first home that you can stick with for a decent amount of time. But you should also consider what you want the step after it to be. If you are buying a one- or two-bedroom home, have you thought about whether you want to have children? If you are buying a long way out one side of the city, what would happen if your work changed and you suddenly found yourself having to commute right over to the other side?
Do you see yourself selling the property when you want to move on, or keeping it as an investment? If you plan to rent it, is it something that will attract good tenants and a good rental return? Would it be hard to maintain as a rental property?
Stick to what you can safely borrow
There is an argument for stretching yourself when it comes to buying a first home, but it's important to be realistic.
Is your income reliable? Are you circumstances likely to change – will you want any time off in the next few years? How would you manage if your mortgage payments increased?
Most banks check borrowers' ability to service a loan by looking at how they could cope with interest rates in the mid-7 per cent range.
Before you agree to anything, run the numbers through a calculator such as the ones on Sorted. Look at what your repayments will be at current rates, what they would be at 7 per cent and what they would increase to if rates hit 10 per cent. At the moment that seems unlikely, but double-digit interest rates were common as little as 10 years ago.
If the bank is offering you a larger loan than you are comfortable with, don't take it. If you know you would struggle to deal with a big rise in interest rates, consider fixing for a longer term. You will pay a bit more now but it will provide certainty.
Structure your loan properly
You can save money and get rid of your debt faster by getting your loan structure right. Set it up over the shortest term you can feasibly handle. The faster you pay it down, the less interest you pay. If you set up a loan over 20 years but then your circumstances change, most banks will let you refix out to 30 years once your fixed-term loans expire.
Paying fortnightly rather than monthly gives you two extra payments a year – allowing you to cut down your interest bill painlessly.
But if you do not want to commit to the higher repayments of a shorter loan term, there are other ways. You could have part of the loan on revolving credit. That works like this: Float $50,000 of your loan. Have this in a revolving credit account. Each month, put all your expenses on your credit card. Have your income go into your revolving credit account and sit there for the whole month.At the end of the month, withdraw the money to pay off your credit card. This means you have less of a loan for most of the month - and a lower interest bill. You also have the freedom to pay off this bit of your loan faster, if you can.
The market in North Canterbury continues it buoyant run with buyers still seeing great value in properties all over the region.
We have seen strong sales activity in lifestyle properties in the lower North Canterbury market as purchasers begin to understand the possible upside the Belfast Western Bypass will bring to region by making the city commute less congested and adding potential value gains to properties. In smaller markets north of Amberley we have seen strong uptake of all property types as the roading rebuild through to Kaikoura begins to get underway and sub-contractors begin to look for accommodation for staff.
Add into this strong activity in Kaiapoi, Rangiora and Hanmer the market is looking good for the foreseeable future.
Licensed Business Owner of Harcourts Twiss-Keir Realty
Licensed Business Owner of Harcourts Twiss-Keir Realty