Part 1: Buying a House - the Financial Pinch

January 14, 2015

 

January 2015 has arrived and the New Year’s resolution is to build equity and provide an investment for the future.

It all seems logical, but if you haven’t purchased a house before it can seem extremely daunting! Likened to climbing Mt Everest for some, the difficulty in knowing what we don’t know can just make this decision just that much harder.

Well don’t fear, over the next few months we’re putting together a series of writing to consider as a starting point and provide you with something tangible to base your purchasing decisions off. This is to provide a starting point and shouldn’t be considered as a substitute for legal advice – there is definitely a need to consult with your lawyer. 

Get yourself a lawyer. Leading on from the above comment, you’ll need a lawyer to look after the ‘formalities’ of the purchase – ensuring the paperwork is in order, money is transferred for the sale and has been received, and they will likely be the ones that you’ll pick the keys up to your new home, when all is said and done.

We’re getting ahead of ourselves though. What do you need to consider before getting to this point? In this instalment, we’ll look at everything that impacts the financial decisions around purchasing. In the coming months we’ll also delve into what to look for when attending an open home.

 

Do I need to buy?

The kiwi dream to own a house is certainly engrained us. The question is whether at this point in time in your life that you actually need to own house? Owning a house should be seen as a long-term investment. Unless you’re in the business of ‘flipping’ houses where purchasing, renovating, and re-selling in a short period of time is your full time job, think long-term ownership and know that the value of your house will fluctuate over time.

You also need to consider your lifestyle – are you looking to remain in the same place for a few years? Are you happy renting and/or flatting in your current location?

 

Can I afford it?

After making the decision that ‘Yes, I want a house’, can you afford to service a mortgage? A mortgage is the loan that you will most probably need to take out with a bank in order to make the purchase.

There are other ways to get on the property ladder and get support in paying the mortgage – this may include flatmates, or potentially renting the house to another and making up the difference between the mortgage requirements and the rental income (though you have just become a landlord and will open up a new can of worms – or alternatively give us a call at First Avenue and we can take care of this for you).. On your income, can you service the loan repayments along with meeting your other expenses? Only when you are sure that you can do this, is it worth even entertaining the idea of home ownership.

 

Can I make my money back when I sell it in the future?

From the outset, with any house purchase you should always have in the back of your mind that it can be sold on at any point for at least what you paid for it. Part crystal ball, part reality, an up and coming area will always maintain or increase its value; alternatively an established area may not see a major move in prices over time. You want to ensure that you don’t over pay when you buy, and will not lose money when you sell.

 

Mortgage rates and types

The mortgage rate will define the additional amount of money you need to pay on top of paying off the principal component of the loan – this is essentially the bank’s reward for lending you money. Each of your repayments will be made of a principal repayment plus the interest on the loan. The higher the interest rate, the more you will have to pay; the lower the interest rate, the less you will have to pay.

You can read more on New Zealand mortgage rates in an early post here.

There are two types of mortgage rates – fixed and floating.

Fixed mortgage rates are offered at ‘fixed’ rates over the term of the loan. They provide certainty over the length of the period in which you pay a fixed rate for. Its advantage is that you know exactly what you need to pay weekly, bi-weekly or monthly; and that you can save money during periods where the floating rate may exceed the fixed rate. Alternatively, its disadvantage is that you are having to pay more to service the mortgage when you could be paying less on a floating rate.

A floating rate ‘floats’ on the open market and changes based on changes within the economic environment. The floating rate is generally offered at lower rates than a fixed rate but has the ability to fluctuate depending upon a variety of factors such as central government fiscal policy and fluctuations in the currency markets etc. The advantage of a floating rate is the ability to have lower repayment values, but as the rate increases, there may be a point at which repayments levels will exceed possible fixed rates.

As part of your mortgage structure, you are also able to split your mortgage and include some on floating, and some on fixed if you wish. You can also alternatively fix parts of your mortgage for different periods i.e. some for one year, some for two years, some for five years etc.

To discuss what will be best for you, discuss this with you bank’s mortgage manager or alternatively you can employ the services of a mortgage banker who will look at all the banks offerings and look to get you the best deal on a mortgage based on what you can afford.

 

Deposit

Most banking institutions will require you to front with a 20% deposit in order to access the other 80% of the loan.

So for a $325,000 house, you’ll need to have $65,000 in savings or get this money from a different source (such as family, a trust etc.). Without the deposit, there is no way to access the loan.

 

Add-ons

As if buying a house isn’t expensive enough, there are a number of other expenses to take into account. Some of these will be incurred automatically but others are optional, but risk involved.

  1. Bank fees – the bank will charge fees for setting up the mortgage.

  2. Valuation fees – it is generally optional to have the house valued (if not already done so), but may be part of the bank’s requirements to ensure that if things went wrong, that they would be able to recover their money.

  3. LIM Report – the Land Information Memorandum (LIM) Report can be sourced from your local council office, and the LIM provides property information – location of storm water and sewer services, government valuation and summary of rates, approved alterations (such as decks, conservatories, spa pools and fire places), potential development restrictions etc. It provides comprehensive information on a property which allows you to make an informed purchase decision.

  4. Builder’s Report/Survey – for peace of mind, you may want to engage a builder to give the house a thorough inspection and identify if there are any areas of concern in regards to the house. For larger and older premises, you may also need a structural engineer’s report.

  5. Lawyer’s fees – unfortunately for you, the lawyer also needs to be paid to ensure that the purchase of the house is totally legit.

  6. Fitting out a new house – not something that is typically incurred with the purchase but a secondary expense, is the purchasing of new furniture, dressings and extras in order to kit out the inside and outside of the house. It is not only inside you may need to worry about, outside you may need to purchase a garden sheds, lawn mower, etc.

Shop around when getting your mortgage. There are a number of banking institutions offering inducements and incentives when taking up a mortgage with them that helps offset the costs of the above.

 

What else to consider?

Location, location, location. It is so important where the house is located. This will help determine how much you can be expected to pay for a house. Other factors to consider will be proximity to schooling, medical facilities, city centre, the water, views and landscape etc.

 

In the next instalment…

In our next instalment we’ll discuss the things to look for when attending open homes and some of the key questions to ask the real estate agent.

Have you identified something financially that needs to be considered when purchasing a home?  Let people know in a comment below. 

 

Photo Credits:

Money with a window – 2010-06-02, by Kristina D.C. Hoeppner, CC BY-SA 2.0

 

 

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