If you're planning to move to a place of your own, you've probably already started to think about mortgages. But before you start searching for real estate, are you able to answer this question — how much can I borrow for my mortgage?
In this blog, we'll cover how to work out affordable options, what lenders are looking out for when you apply and how to sort your deposit so getting your mortgage secured is easier.
A great way to work out what you can afford to pay on your mortgage is by using a home loan calculator online.
Home loan calculators are great tools for working out repayments based on interest rates and different deposit amounts. Many home loan lenders offer mortgage calculators on their sites based on the loans they offer. You can get a general idea from using an online calculator — but remember, each site will have its lending practices, so shop around with different lenders. A little research should give you a clear picture of what you might find yourself repaying each week.
Banks aren't usually keen to lend you the total amount for a house — especially if you're a first-time homebuyer. To secure the place, they'll ask that you put down a proportion of the property's value as a deposit based on a percentage of what the house is worth.
Rule of thumb.
The more you can put down as your deposit, the better. You'll need to borrow less money, which boosts your chances of being accepted for a loan. Plus, with less to pay back, you'll be able to pay off your mortgage faster, with less interest. That means more money for decorating your new place, taking holidays or even fitting in a new sound system.
As a new home buyer, you'll usually need to put down 20% of the home's value as a deposit. Some lenders might let you work with as little as 5% (if your finances are in order), while others ask for 10%. But most of the time — and to secure the best rates — plan for 20%.
If this sounds like a lot, there are lots of ways to start building up a deposit right now;
Start putting a little money aside into a savings account for every paycheque. You could even look at getting a term deposit — that way, you know you're not going to touch it for a while. Just $10 a week could secure you $520 after a year.
Did you know that you can withdraw nearly all of the cash in your KiwiSaver to put towards buying your first home? Getting started on KiwiSaver early could make a big difference when purchasing a home, and you can choose your rate of contribution.
KiwiSaver HomeStart Grants.
Kainga Ora also offers First Home Grants of up to $10,000, which you can put towards buying your first home. You'll need to meet eligibility requirements, including regular KiwiSaver contributions for at least 3-5 years (we touch more on this topic in another blog). Grants are subject to price caps and other conditions, like your debt balance and income — so it's not a given you'll get one. But you won't be guaranteed anything unless you're signed on to KiwiSaver, which is why it's crucial to get it sorted as soon as you start working.
What's looked at when you get a mortgage?
What if you decide to have kids? What if you lose your job and your income suddenly drops? What if interest rates skyrocket? There are many factors to consider when working out that crucial question — how much can I borrow for my mortgage?
Firstly, what can you afford to spend? When banks look over your application for a mortgage, they'll consider your income and monthly expenses to make sure you have enough to live off after the bills are paid.
That's why they'll ask you for a bunch of financial documents, so they can check out what kind of money you've got coming in and going out each month. They'll look at:
- Proof of regular income (like payslips)
- Any extra income you receive (like child support)
- Your monthly expenses (like rent and groceries)
- Any debts (like store cards, loans and credit cards)
- Assets (like your savings or ownership of expensive items)
There are a few other things to consider, too, when working out how much you can afford to borrow. They include your credit score, how much money you have after covering your expenses, and the current interest rates.
Banks are also likely to perform a credit check to determine how likely you'll pay your mortgage on time.
Get your credit in order.
When deciding what to pay out for your mortgage, your lender will look at your credit report. It's their way of working out whether you're likely to meet all your repayments on time.
If your credit score is poor, lenders might only be willing to offer you smaller loans, load you with higher interest rates, or even outright reject your application for a mortgage.
That's one big reason why you've got to pay off any debts before you start saving up for your deposit. You'll boost your credit rating by meeting repayment obligations and improving your chances of being accepted for higher loans and better interest rates. Your credit score plays a significant role in influencing how much you can borrow for a mortgage — so do check out our page on credit scores if you haven't already.
Have you already been rejected for a mortgage by mainstream lenders? Well, you might have to consider taking out a home loan from an alternative provider if you have bad credit. But while you might be stuck paying higher interest rates initially, your credit score will grow if you keep hitting your repayment deadlines. That means you'll have the option to switch out your not-so-great mortgage for one with better interest rates down the line.
Putting down a deposit on a house is tricky — lenders will offer you all sorts of different rates for the same type of property. The general rule is — the more you can put down upfront, the lower the interest rate you'll get.
The good thing is there are saving schemes to help you out. KiwiSaver allows you to put money aside weekly and even opens you up to home grants down the road. So if you've been contributing for a while, it's worth checking what sort of grant you could get.