09 May Mortgages 101: A Step-By-Step Guide For First-Time Home Buyers
It’s never too early or too late to start thinking about your dream first home. We’ve compiled an introduction to the basics to help you apply for a mortgage as a first-time home buyer.
Before you embark on your first-time home buyer mortgage journey, there are a few important steps you’ll need to take—from saving a deposit and arranging mortgage pre-approval to finding and buying your property.
To help you understand each of the steps you’ll take and what’s required of you, we’ve created this complete guide to buying your first home. Continue reading to learn how to start and where mortgages fit into the first home roadmap.
How long does it take to apply for a mortgage?
Applying for a mortgage is an important part of securing your first home. Chances are you already have an idea of your timeline. Equipping yourself with a solid grasp of your finances will expedite this process. How long it takes for you to apply for a mortgage will depend on the size of your deposit and how competitive the market you’re interested in is. Once you have saved for a deposit, a mortgage pre-approval decision can take up to 3 weeks.
Mortgages step-by-step
A mortgage is likely one of the largest loans you’ll take out in your lifetime. It is repaid in instalments, and what this looks like for you will depend on your situation and priorities.
1. Getting your finances ready
Saving a deposit is an important first step for all first home buyers. It’s also the biggest stumbling block preventing many first home buyers from getting into the property market. That’s because lenders generally require you to hold at least 20 percent of the property purchase price as a deposit. And in a heated property market where house prices rise faster than borrowers can save, that makes things really complicated.
The good news is, there are options available to help first home buyers save a first home deposit. Understanding the different thresholds of each avenue available to you is an important part of knowing how to apply for a mortgage as a first time home buyer.
KiwiSaver Withdrawal may allow you to make a one-off withdrawal of your KiwiSaver savings (except $1,000, which must remain in your KiwiSaver account), provided you’ve been a KiwiSaver member for at least three years.
Additionally, a First Home Loan can also make it easier for you to buy your first home by lowering the required deposit. Those eligible for the First Home Loan scheme could buy a home with just 5 per cent deposit.
Other options include the Bank of Mum & Dad, which has become more and more common over the last property cycle. In addition, players have come into the market offering co-ownership opportunities. These are a little more complicated, so we recommend you talk to an experienced and qualified Mortgage Adviser, like those at Max Mortgages.
2. Secure pre-approval
Once you’ve saved a deposit, apply for a mortgage pre-approval, a conditional agreement from a lender confirming how much they’re prepared to lend to you, provided you meet the conditions of the agreement. This process is beneficial because it provides a clear house-hunting budget and strengthens a property offer, showing sellers that the buyer is serious and financially capable. Pre-approval is often necessary in competitive markets to stand out among other buyers.
Having a mortgage pre-approval before you start house hunting means you can shop with confidence, knowing you can secure finance up to a specified amount. It also allows you to bid at a property auction. And with pre-approval, you can move quickly when you find the house you want to buy.
To obtain pre-approval, buyers must submit documents such as proof of income, savings, debts, and identification. It’s crucial to meet the lender’s criteria, which can be confirmed through the pre-approval application process.
Often, some lenders will only consider “live deals” (i.e., a property under contract). But a good Mortgage Adviser will be there to help during this process to help align the contract discussions with finance requirements.
3. Finding the right home
With a mortgage pre-approval in place, you’re now ready to start house hunting. But before you head out to open homes, take a minute to understand the types of ownership in New Zealand, as each of these means a different set of rights, responsibilities, and restrictions for the owner.
- Freehold: Also known as fee simple, this is the most common type of home ownership in New Zealand. It means you own the land and anything built on it unless there are registered or unregistered interests.
- Leasehold: In this arrangement, someone else owns the land, and you buy an exclusive right to possess the land and any buildings on it for a specified period of time, according to the terms of the lease. At the end of the lease term, you return the land and the buildings to the freehold owner.
- Unit title: These are most common in building developments where there are multiple owners. With this type of ownership, you automatically become a member of the body corporate, consisting of all unit owners who act as a group and make the day-to-day decisions about the property.
- A cross lease: You own a share of the freehold title in common with other cross leaseholders. Any changes you make to the footprint of the area you are entitled to use exclusively or to the shared areas must be agreed upon by all or a majority of the owners.
Be sure to thoroughly research the details of any property you are considering making an offer on and understand how the different methods of sale will impact you making an offer. Sale types include:
- Auction, where properties are sold to the highest bidder.
- Negotiation, where buyers and sellers agree on terms.
- Deadline, where offers must be submitted by a specific date.
- Tender, where confidential offers are submitted by a set date.
Finding the right property can take time, and often, your first home isn’t your dream home. But it can be a first step in the right direction, giving you entry into the property market and options for future house purchases.
4. Making an offer
When you’re ready to move forward, make an offer on a home. Once the seller accepts your offer and the sale and purchase agreement is signed, you have a short time to work through any conditions specified in the offer. Be prepared to provide your lender with additional details about the property you intend to purchase. Your Mortgage Adviser will liaise with you and your lender to confirm your finances and ensure you understand the financial conditions of the offer.
Have your lawyer review the record of title and the LIM report (Land Information Memorandum) to highlight any potential hazards or future issues with the property. Arrange for a property inspector or building inspector to inspect the property and report back. As part of your home loan approval, you will need to have house insurance in place before the settlement date, so get in touch with a Max Insurances Adviser to talk about your house insurance requirements.
5. Going unconditional
When all the conditions have been met, the sale becomes unconditional. Up until this time, you and the seller can withdraw from the sale if any of the conditions specified in the sale and purchase agreement are not met on time.
Be prepared to pay the purchase deposit agreed in the sale and purchase agreement once the sale becomes unconditional. Again, if you don’t have the cash sitting in your account for your deposit, Mortgage Advisers can work through options for you.
6. Finalise the mortgage structure
A mortgage structure refers to how you decide to set up your loan, which will determine the pace at which you will repay your mortgage in the long term.
This includes the mortgage interest rate attached to the loan, which comes in two main categories: fixed or variable. Fixed rates refer to interest that remains the same for a period you agree to. Variable rates, also known as floating, are interest that fluctuates and moves up or down over time. You also have the option of using both.
The repayment structure is also central to your mortgage. Each repayment often comprises principal and interest, and the amount spent on each one will change over the mortgage’s lifespan.
7. Settlement and move-in day
Congratulations, you now own a home! But before you move in, there are a few things you need to take care of.
- Arrange a pre-settlement inspection: this is your last chance to walk through the property and check that the property and chattels are in order. If you have any issues or concerns, bring these to the seller’s attention.
- Confirm with your lawyer that your home loan is in order.
- House insurance is usually a condition of property finance, so check that it comes into effect from the day you take possession.
- Book a moving company if you’re using one and plan for your moving day.
Get started with your first home
Now that you know how to apply for a mortgage as a first-time home buyer, it’s time to align your goals with a plan. As you begin your first home journey, you’ll find there’s no single approach that opens every door ahead of you. Creating a first-home plan is easier with more support, which a Mortgage Adviser can provide.
Set yourself up for success by reaching out to professionals, such as Mortgage Advisers from Max Mortgages, who specialise in helping Kiwis arrange home loans NZ-wide and can guide you and help you understand what’s required of you throughout the home buying process. Get in touch with Max Mortgages today if you have questions about buying a first home.
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