I’ve been a mortgage adviser for over 25-years, focused heavily on helping first home buyers and have seen many initiatives specifically for first home buyers come and go over that time.
These have been introduced over the years by various Governments, we’ve seen rebranding then had changes and of course we’ve seen them stopped for various reasons too.
The latest headline has been the ending of the First Home Grant and that has caused a lot of comments on our first home buyers Facebook group (Kiwi First Home Buyers Group), but it was not the first and I’m sure that it will not be the last.
What Help’s First Home Buyers?
There are plenty of people that will have ideas on what can help first home buyers, and as a mortgage adviser I am one of those; however I have probably helped more first home buyers than most people and therefore have seen a huge range or people all in varying situations – but many have similar issues too.
We often hear people talk about the three biggest hurdles – deposit, income and existing debt.
In many ways these are obvious, but they are also the reasons that a bank might use to say “NO” when you want a home loan.
Deposit – the bigger your deposit, the less you have to borrow but there are some other advantages with having a larger deposit and especially if you can start with more than 20% deposit. Low deposit home loans are referred to as being those home loans where the borrowers (you) have less than 20% deposit, and for these low deposit home loans there are extra rules and restrictions that make getting them harder.
Income – of course everyone wants a higher income and people always believe that the extra money will solve all their financial issues too. More income might mean you can save more and it also means that you can afford to borrow more, so getting extra income or a part time job can really help first home buyers.
Debt – it’s easy to get debt and while you might be fine with paying off your credit cards, store cards, hire purchase and/or a car loan they all require a part of your income to pay those repayments and this leaves less available for the home loan.
These all make sense … they’re obvious.
Then there are other things that first home buyers tend to focus on such as any grants, deals and of course options for home loans and interest rates.
But less obvious is what I would consider the most important factor for a first home buyer.
The Number #1 Issue For First Home Buyers
When you look at everything to do with buying your first home there is one issue that affects almost everything – inflation.
It’s something that is just there, but when you look at the impact of inflation it has a huge affect on not just first home buyers.
Consider some of these:
Deposit – when your everyday expenses and rent are increasing you have less money left over and therefore it is harder to save your deposit. It’s also harder to grow your investments as many of those companies you may be invested in have had reduced profits too.
Income – you need your income to increase just to stand still. Normally when you get a pay increase you end up having more money to save, use to reduce debt or spend; but in recent times (and previously when inflation has been high) any increases seem to evaporate into just paying the extra living costs. You need a significant increase in pay to actually start really getting ahead.
Debt – if you are paying just the minimum on your debts or paying them without a real plan then it can seem to take a long time to pay them off. You really need to have some surplus money to make good headway and that’s often lacking in times of higher inflation.
Interest Rates – as we have seen, the Reserve Bank has increased the Official Cash Rate (OCR) to try and slow inflation and so we have had higher home loan interest rates too. They might not seem too bad and you may have done your own calculations and know that you can afford the home loan repayments, but the banks use a higher rate when they assess your ability to get a home loan and as they are pegged to the actual interest rates (about + 2.5%) then the banks may say that you cannot afford that home loan anymore.
Building Costs – with prices increasing so does the cost to build and that affects the end price of a new home, and therefore can often push up the house prices on existing homes or puts the brakes on developments which can leads to a shortage of houses in the months ahead. People are currently looking at house prices that have dropped and especially some areas where many new builds are being completed, but looking to the future there will be a real lack of new houses being built and that is likely to see an increase in those prices – house inflation.
As you can see, inflation can affect a lot of things and when you look at these together it’s not great for first home buyers.
To be honest inflation is an issue for most Kiwis and especially anyone that has a home loan.
What’s The Real Cost?
Let’s start by just looking at the increased interest cost.
We saw in the Reserve Banks announcement that they are expecting inflation to be back within the target range (1% – 3%) by the end of 2024, and while the OCR and home loan rates have not decreased yet we are hearing a number of economists predicting that home loan rates could reduce by approx 1% by the end of the year and then an other 1% by the end of 2025.
Assuming that the inflation target is met, then it’s not unrealistic to see interest rates of about 5.00% – 5.50% within a year.
We also know that the average home loan in New Zealand is $369,435 or for first home buyers is $555,635 (Canstar – December 2023) and so an interest rate reduction of just 1.00% will save the average first home buyer about $5,500 per year which is more than $100 per week.
That’s a significant saving – we just need to make sure that inflation comes down.
BUT – a lower interest rate also means that the banks should also reduce the test rate they use, and that means hundreds of people that are currently not able to buy a home will be given that opportunity.
You might not agree that this is the number #1 issue for first home buyers, but it’s definitely right up there.
