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Preparing Your Application
Before thinking about buying a house, it is good to get a base understanding of what is required for a pre approval and what to expect.
Deposit – generally for first home buyers a minimum of 10% deposit is required. Most banks require 5% of this to be genuine savings which can include your Kiwisaver balance with the rest coming from other sources. This can include a gift.
Contact your Kiwisaver provider to gain initial approval to withdraw your Kiwisaver.
The banks assess deals differently, depending on how much deposit you put in:
- 20% or more deposit
- Less than 20% deposit.
Lower interest rates – purchases with less than 20% deposit have whats called a “low equity margin / premium” added onto the interest rate which can be anywhere up to 1%.
Cash back – The bank provides a cash contribution upon settlement to you. This is significantly reduced with a deposit of less than 20%.
Assessment criteria – The banks are much harsher and critical when deposit is less than 20%. For example:
- Border/flatmate income for some banks are not used or reduced
- For self employed income, you generally cannot use forecasted income and banks want a minimum of 2 years financials
- Account conduct such as dishonours and late payments are highly critiqued
- Bonus or commission income carries less weighting and can be scaled more heavily
With 20% deposit or more, these things can be often mitigated and accepted.
Choice of lenders – Many lenders are only offering less than 20% deposit loans to existing customers.
Here is a list of costs associated with the home buying process:
- Valuation – if deposit is less than 20%, a valuation is always required. This costs on average $1,000 and ranges from $750-$1,500 generally, but is case by case.
- Building inspection – majority of time this is optional and not a requirement of the bank. This is usually $500-$1,000 and mainly done for the customers own satisfaction. Price depends on complexity.
- Legal fees – It is recommended to engage with a lawyer as soon as you find a house you are interested in to review the draft Sale and purchase agreement. They can help protect you and save a lot of money in the long run
- New ongoing expenses include house insurance, council rates and home maintenance costs
- One-off costs – moving costs. Remember to change over all your services such as broadband, electricity, furniture removal, transport and lastly, redirect all your mail
This is an important step which Ascend can help you ascertain quickly. Each bank has a different calculator and accounts for various expenses and income differently which can lead to sometimes eye-watering differences between what each bank will lend to you.
A lender will account for all of your income sources and all of your debts whether it be personal, business or trust income.
Types of income:
- Salary / wage – taken at 100% almost always
- Bonus / commissions / overtime – this is scaled down differently per lender
- Rental income – this is scaled down differently per lender
- Border / flatmate income
- Self employed / contract income – This can be scaled, annualised or forecasted
- Dividends / Investment income – this is scaled down differently per lender
- Superannuation / IRD various benefits / WINZ Benefit
Lenders will need to account for all of your fixed expenses
- Any loan repayments
- Credit cards / overdrafts / buy now, pay later facilities – These take a heavy toll on servicing. Lenders account for these as though they are fully drawn and account using 5% of the limit for a monthly repayment. E.g. if you have a credit card limit of $10k. $500 per month needs to be input as an expense. This is why it is important to keep unsecured short term debt to a minimum
- Fixed living costs need to be verified e.g. private schooling, insurances, child support, Kiwisaver contributions
- Discretionary expenditure – regulation has tightened up on this and expenses such as entertainment, dining out, bars/clubs, gyms etc. are now looked at in very fine detail
- Essential living costs – This is things like vehicle expenses, food, clothing, medical expenses and utility costs
- Existing mortgage lending – This is all assessed using a test rate which is much higher than the rate you are likely going to pay. The banks do this to protect you from any future rate rises or drops in income so quite often if the bank says no, but you think can afford it, this will be the disparity. Test rates are often 2-3% higher than the variable rate at the current time.
Interview & Pre-screening
This is the start of our journey together. In this phone call or meeting the purpose is to complete a financial health check-up and understand where you currently are with money, what your goals are and what you want to achieve.
This allows us to get a feel for which lender to use for your case and how to present the application and what we will need. It also acts as a planning session.
Once the interview is complete there will be a checklist sent to you for information we need. If you are not in a position to apply, we will make a plan to reconvene once the initial requirements are met. At that point, we will prepare an application to put your best foot forward.
Preparation and collection of documentation
These are common items generally required for an application:
- Application form (statement of position)
- Proof of all income sources e.g. payslips, up to date financial accounts, IR3/IR4’s, forecasts, rental agreements etc.
- All bank statements under your name including all personal, business and trust bank accounts
- This includes any existing loan statements, credit card statements and overdrafts to determine their limits, repayments and conduct.
Identification – Passports, Drivers licenses (front and back), Visa’s
- Sale & Purchase agreement – if there is a house you have already found, provide this document along with any other property documents available
- Contracts – for salary and wage, employment contracts may be required to determine your base contracted hours in regards to your employment
There may be other items specific to your case, but the above are the key ones. We need to validate every input used in the servicing calculator for both income and expenses.
Approval process and searching for a house
Once all information is received, a full application can be submitted to the lender and ideally an approval is received. This often comes with conditions such as a valuation, closing credit cards, paying off a loan or the finalised Sale & Purchase Agreement, to name a few.
While sorting these conditions (if any) it is a good time to start looking for a home once pre-approved.
The main thing needed before placing an offer is for the property to be approved by the lender.
To do this, simply provide the draft Sale & Purchase agreement for the lender to approve and the property to be acceptable to them.
If they are happy and the conditions have all been met, you are free to place an unconditional offer.
Structuring your loan
Once you go unconditional and know the settlement date for your house, the loan structure can be finalised and interest rates can be locked in up to 60 days before settlement in most cases.
A conversation will be had how you want to dice up your mortgage e.g. fixing seperate portions for 1-5 years or having some on floating or revolving depending on your future requirements.
We then fill out the paperwork and send handover forms to the lender. They then onboard you as a customer and send the loan documents to the solicitor for you to sign.
Moving in and the future
On the day of settlement, people generally move into their homes and get the keys. This is just the beginning of a lifelong relationship with your advisor.
We are here for you anytime you need and free to call whenever for advice which can be invaluable to your future.