The Wise Parent’s Advice Guide for Kids Buying Their First Home

“I have a few questions Mum, Dad. I hope you can help. I really want to own my own house one day soon and I’ve been saving, like, a lot”.

“What should I do next?”

“How can I make it actually happen?”

“It seems pretty dire these days and the competition for property is just brutal. Perhaps I shouldn’t bother?” 

What are you going to say during those conversations with your kids? Saving for and buying a first home is a huge rite of passage that isn’t unobtainable with the right guidance and support. You were dealt a different hand of cards that came with their own, unique issues when you purchased your first home, no doubt, so it may be a little confronting to offer advice designed for this generation and not yours.

First home buyers today are trying to overcome hurdles that take a creative approach to overcome. An approach that you might not have considered. Let the team at MHQ help.

For the wise parents out there, and also for those motivated and determined first-home buyers doing their own research, check out this handy advice guide that can help make those potentially difficult conversations about deposits and buying a first home that much more promising and exciting.

The steps to buying your first home NZ

Like anything that seems a little overwhelming in life, you break it down into bite sized pieces, and it is a whole lot more manageable. 

So here are the chunks you need to rip off if it’s your ultimate goal to buy a first home here in NZ. Obviously, there is a bit more to buying a house in NZ.

Talk to a mortgage adviser to avoid regrettable mistakes

This is free of charge and could be the most valuable 45 minutes you can get as you prepare to buy a first home. First home buying tips are dished out and realistic conversations are had so that you can budget effectively. It may be that you go away and come back in 6 or 12 months after following our advice to ensure that you’ve got the best chance of success.

A mortgage advisor will give you a comprehensive review right on the spot highlighting the benefits from different banks. Only such professionals have such broad knowledge. It would take a lot of time and energy to approach different banks and non-bank lenders and work out the differences between each one, understanding what would suit you best. A good adviser will help you understand the difference between becoming a guarantor for your children, buying as a partnership, and using a gift to support their deposit. There are so many nuances with each of these options and you simply won’t get the same level of detailed answers without a good mortgage adviser helping you. 

Get pre-approval

Your next step is to approach a bank to see whether you qualify for pre-approval. This is a figure that the bank agrees to lend to you, given that your financial circumstances or their conditions do not change. Pre-approval is generally valid for 90 days. You do not want a scatter gun approach here because it’s a waste of time and a big hit to your credit score if you apply at all banks. You want to understand from someone in the know what banks are going to be best for you based on your specific situation and the bank policy at the time. The old school method of calling up your banker mate might be the worst thing because they might lead you down the wrong pathway. 

You can get a rough idea of how much you could borrow by using different mortgage calculators first. But be aware that banks will lean towards the conservative side and consider your ability to service a loan with much higher interest rates for their added security. 

Mitigate risk

Reaching a 20% deposit can be difficult, but there are options available that allow you to buy a property with a lower deposit, depending on your circumstances and the lender’s criteria.

For wise parents who are able and looking to help their kids as best they can, helping them to reach that 20% deposit threshold could save them thousands in additional fees and interest rates. We will go into this more soon. If you can’t help with getting your kids to 20% do not stress, it’s not a must. 

Setting up your loan

Finding the best way to set up your mortgage is a different journey for everyone. A great mortgage advisor is someone who really understands not only what is available out there, but also what home loan structure is going to best suit your usual spending habits and your personality. 

Although the technical process doesn’t alter whether you are buying your first home or your 10th, there are a few differences in the approach that we will focus more on here to make sure that first home buyers are doing what they can to find success.

The first home buyer deposit guide

Don’t forget that first home buyers can benefit from KiwiSaver which can reduce the amount of cash you need to fork out as a deposit. 

If you’re eligible, you can draw out all but $1,000 of your KiwiSaver to help towards a deposit for a first home.

But do you need a 20% deposit to secure lending? Not necessarily. The deposit you need will depend on your circumstances, the property you’re buying and the lender’s current lending criteria.

In some circumstances, first home buyers may be able to purchase with a deposit as low as 5%, including through certain Kāinga Ora-supported options, subject to eligibility and lender criteria. A lower deposit can make it possible to get into the property market sooner, although there may be additional lending requirements or costs.

Lending criteria and bank policies can change over time, so it’s important to understand what you may qualify for based on your circumstances and the current lending environment. Being financially prepared can put you in a stronger position when you’re ready to apply.

With a lower deposit, lenders may have additional requirements around your income, existing debts, affordability and the property you’re purchasing. There may also be additional fees or costs associated with lower-deposit lending.

The difference between a 10% and a 20% deposit (for education sake)

One consideration for buyers with less than a 20% deposit is that the lender may require a registered valuation or have additional lending requirements before approving the loan. This can be particularly important when buying at auction, as you generally need to have your finance confirmed before bidding.

A 20% deposit can give you access to a wider range of lending options and may mean you avoid some of the additional costs associated with lower-deposit lending.

With a deposit of less than 20%, some lenders may charge a higher interest rate, low-equity premium or other additional fees, depending on their lending criteria. These costs can add up over time, so if you are in a position to increase your deposit to 20% or more, it can be worth considering the potential long-term savings.

However, waiting until you have 20% isn’t necessarily the right option for everyone. For some first home buyers, purchasing with a lower deposit may allow them to get into their first home sooner. It’s about weighing up the costs of lower-deposit lending against your circumstances and plans.

As you pay down your mortgage and build equity, your lending position may improve. Once you reach 20% equity, it can be a good time to review your mortgage and check whether you are eligible for a lower rate or for any low-equity charges to be removed, depending on your lender.

If you’re considering increasing your deposit to 20%, it’s worth comparing the potential savings against the time it may take to reach that level.

How can parents help these first home buyers?

One such way that parents can help their kids to get into their first home is to either:

Gift them the money.

Parents or family members may be able to help first-home buyers by contributing towards their deposit. This could come from savings or, where appropriate, by borrowing against equity in an existing property.

If the funds are provided as a genuine gift, there should be no expectation that they will be repaid. If repayment is intended, this should be disclosed to the lender and structured appropriately as a family loan or other arrangement.

Be a guarantor.

Another option is for parents to act as guarantors, although this is less common than providing a gifted deposit. It can also be more complicated, particularly where there are other siblings to consider or where either party may want to borrow again in the future.

If this is the only available option to you, then make sure that you use a mortgage adviser to explain the advantages and disadvantages as a bank will always look out for their own interests first and may neglect to enlighten you to certain aspects of this path. 

Don’t forget about the long-term

Getting approved for a home loan is only one part of the journey. It’s just as important to make sure the repayments are affordable both now and if your circumstances or interest rates change.

Make sure you understand your ongoing mortgage repayments and other property costs, and that you have enough room in your budget for unexpected expenses.

There are plenty of free mortgage calculators available and the one designed by MHQ is a brilliant tool that gives you the knowledge and confidence that you need to make sure you are in a healthy financial position as a first home buyer.

Think (and live) outside the box.

Purchasing your first home isn’t only about saving for a deposit. Finding the perfect property has a lot to do with being in the right place at the right time. All of those who find success however, whether it takes them 2 months or 2 years, are committed and ready to make a decision when an opportunity crosses their path. 

Increase the chances of finding yourself in a good position by following these unconventional first home buyer tips:

Find undesirable properties. 

This is especially true in major cities. Don’t compete with developers who have deep pockets so avoid homes that have developmental potential in the short and long term as they are going to attract more interest. 

Look at the zoning. A flood zone or a single storey zone will attract less interest. A narrow driveway also may mean that the price becomes more reasonable with less competition in your way. 

Recently renovated properties are also less interesting to developers looking to make income on renovating themselves. 

Keep it small.

Developers will be looking for 600sqm or larger sections, where they can put multiple properties. Capital value increases with land size, so keep it small if you’re looking to get onto the property ladder a little easier.

Consider cross-leases or apartments

A lot of people avoid these as do developers, so you may have an advantage over others. We generally don’t advise our clients to buy apartments due to the lack of capital gain, but for a first home buyer who has become frustrated with their options, it may work. Dual key apartments can mitigate costs by allowing you to rent out the other half to generate income. Remember, this is the first rung of a ladder. 

Low yield areas 

Spot what scares others and see if you can live with it. Areas that do not have a high rental yield for whatever reason will not be appealing to investors and therefore leaves the door open for you and other first-home buyers to come in. 

Auctions

Get pre-approval as a first home buyer and don’t be afraid to act quickly. Offer a great price and bring the auction date forward with an unconditional pre-auction offer. The less time it is on the market, the less exposure and attention the property will receive, effectively reducing the potential competition. 

Who are your friends?

When you’re juggling all of these things as you search for that first home,it can get a little overwhelming. Thankfully, throughout the process, you create a team of professionals who you can come to rely on, knowing that they are on your side.

Your mortgage advisor. 

Your mortgage advisor loves watching their clients progress through their home buying journey and helping them in very bespoke ways. Over the time that they spend with their clients, they generally become good friends. 

A mortgage snapshot is one way that mortgage advisors can quickly get their clients on track and let them know what they need to do to align home ownership dreams to reality as quickly as possible. 

A good solicitor

They are going to make your life a whole lot easier and potentially save you a ton of money by adding clauses to agreements to protect you and ensuring that the contracts you sign are fair. You need to understand what you’re signing and your lawyer can cut through the jargon to make sure you do. 

Buyers agents

Specifically for Aucklanders, a buyer’s agent is going to save you a lot of time and give you that edge over others in such a highly competitive market. Let them know what it is you’re after and they can let you know as soon as something becomes available so that you can act quickly. 

Who is the well funded competition?

Developers and investors are really competitor #1. They often have deep pockets and the ability to borrow with 0% cash deposit. You’re on the back foot from the beginning, so your best bet is to avoid where they are looking as a first home buyer. 

Other first home buyers are your next competition although the playing field is somewhat more equal. Putting yourself in the right place at the right time is key here to success. 

A response guide to all those first home buyer FAQs

A quick Q&A that parents might find themselves in when chatting with their kids who are looking to buy their first home. 

Remember that every first home buyer’s journey is different and a mortgage advisor can help them to create a path that is going to work for them.  

Q: Should I buy the most expensive property that I can afford?

A: Usually no. Use your pre-approval amount as a guide. The lower the overall price of a property, the higher your deposit will be and the quicker you will pay off your home loan.

Q: What if I overpay for a property? What if I buy a lemon?

A: Especially if you have a high LVR, a bank is going to ask you for a Registered Valuation. This valuation will be current and will let you know whether you are potentially overpaying for a property because this scenario would not be advantageous for you or the bank. 

Q: What type of loan should I get? How long should I get it for?

A: A mortgage advisor can help you understand what type of loan is going to be best for your financial situation. They will also talk you through the risks and benefits of fixed rates for 1-5 years or floating rates. You can even create a mortgage that is a mixture of many types. 

Q: Can you be my guarantor?

A: There are a few reasons why being a guarantor isn’t the best idea, however let’s discuss whether we can help you to top your deposit up. It will save you from handing over $1000s unnecessarily to the bank with those low deposit premiums.

Q: Should I get an apartment?

A: It’s not a silly idea to consider properties that suit you and your needs right now and they aren’t very attractive to investors or developers, so absolutely! Let’s go check some out.